Part 6/8:
The larger question concerns market valuation, especially given that current stock market valuations are notably elevated. Tools such as Warren Buffett's indicator, which examines the ratio of the total U.S. stock market value to the country’s GDP, and Robert Shiller’s cyclically adjusted price-to-earnings (CAPE) ratio reveal that we are currently two standard deviations above historical norms, suggesting that the market may be overvalued.
This high valuation indicates a precarious balance, as the market's recent surge—an increase of approximately 60% since the October 2022 lows—can equally lead to significant declines. Therefore, caution is warranted.