Investing Metrics You Should Pay Attention To

The Global Macro Monitor blog has some interesting comments in this regard in their post, How Far Can the Stock Market Run?

Our predisposition to the market is always anchored in time tested valuation metrics, which are hard to manipulate. That is why we like market capitalization deflated by some macro variables, such as nominal GDP or wages. Micro measures, such as Price-to-Earnings are way too distorted by buybacks and can be easily manipulated by CFOs, who play around with variables such as depreciation or loss reserves.

Our two favorite are 1) market cap-to-GDP, which, according to Warren Buffet is, “the best single measure of where valuations stand at any given moment.” Take a look at the following chart and you will understand why the Oracle of Omaha is sitting on a record $122 billion stockpile of cash, 2) the number of hours of work needed to buy the S&P500, not a perfect valuation measure but does track our other favorite quite well. The average person, making the average salary is not a big holder of stocks but the metric does give a heads up when the stock market becomes divorced from the underlying economic trend.

Investing Metrics You Should Pay Attention To
(Global Macro Monitor)

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