Are we in a bubble?

By every measure, the US stock market is extremely overvalued. The shiller PE ratio of S&P500 is at a record of 38.25. The only other time it has reached this and beyond was in 2000 dotcom bubble and 2022 both ended with massive market correction.

If you look at famous buffet indicator, you will realise that the current ratio at 208% is 66% or 2 standard deviation higher than historical average. Again both in 2000 dotcom and 2022 it reaches this level and ended up crashing.

So are we approaching recession? Well no one can time the recession/market correction but it will happen.

If we look at the most reliable recession indicator, the 10 year - 2 year treasury yield, it is not looking good.

What is this? Well, a treasury yield curve shows the interest rate that is expected from a treasury bill or US government bond. Typically we expect the 10year yield to be higher than a 2year yield hence upward sloping.

But if Investors is pessimistic, they would rather hold T bills than equity. The demand for long term bond drives down the long term yield of the bond as there is a inverse relationship between the two. This will cause a downward sloping yield curve as shown.

If u look at the chart u will see that each time the curve inverts below the 0% and reinverts we get a recession. Since 1955 we have about 10 recessions and this indicator predicted every one of them. Will it happen again? who knows. This is a self fulfilling prophecy yield curve. If ppl see this chart and expect recession, they will act in a way that WILL cause a recession.

Nevertheless, in this high valuation market with high political risk from Trump administration, is worth to be cautious.

Be fearful when others are greedy and be greedy when others are fearful! Warren buffet has already started piling record high cash like he always do in an expensive market. The most cash he has held other than today was in 2000 dotcom bubble and 2008 financial crisis.  

Personal i believe time in the market is still important but i will be building up more cash in these overvalued market to take advantage of a market crash.