Could this be the worst time to retire?

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Today’s stock market is even further ahead of itself than it was at the end of 1968 — which was one of the worst times over the last century in which to begin a 30-year retirement.

For more than a decade after that year, the stock and bond markets were mediocre performers, at best, in nominal terms. And those returns were further devastated by record-high levels of U.S. inflation.

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Though the stock and bond markets eventually emerged from that terrible period and entered major bull markets in the 1980s and 1990s, it was too little, too late for many who retired in the late 1960s. This points to a general rule of retirement financial planning: Our retirement standard of living is heavily dependent on how the markets perform in the first years of our retirement. Retirees are especially vulnerable to a stock or bond bear market that begins in those early years.

That’s why the comparison of today’s equity valuations with 1968’s is ominous.-

The accompanying chart shows where a handful of valuation indicators stood at the end of 1968, relative to their historical distributions up to that point. A percentile reading of 100 would mean the indicator was telling us that the stock market was more overvalued than at any time up until then, while a reading of 0 would mean it was saying the stock market was more undervalued than ever before. As you can see from the green columns in the chart, these indicators in 1968 were close to the “most overvalued” end of this spectrum.

The red columns reflect where these same valuation indicators stand today, relative to their histories up until now. As you can see, in almost all cases, they are indicating that today’s market is even more overvalued than in 1968. To illustrate, consider the CAPE ratio: At the end of 1968, it was higher than it had been in 93.8% of prior months since 1881. Today, it is higher than in 99.7% of all months since 1881.

To be sure, valuation indicators are not short-term market-timing indicators, so their current status doesn’t mean that a stock bear market will begin immediately. But to the extent history is any guide, a major decline in equity valuations is highly likely at some point in the next decade. Retirement financial planners should take this into account when devising financial plans for clients who are about to retire.

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Status of valuation indicators

The table below, which is updated monthly in this space, provides a different perspective on the stock market’s current extreme overvaluation. It features the same eight valuation indicators as did the chart above, along with two additional indicators for which historical data are not available for the years prior to 1968. All 10 were chosen because of their track records at predicting the stock market’s real total return over the subsequent decade.

With a percentile reading of 100 indicating that the stock market is more overvalued than at any previous time in U.S. history, the average reading in the table below is 98.1. We can hope that the next 30 years will not be as bad for retirees as it was for 1968’s retirees — but hope is not a strategy.-

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