Five of Seven Market Thermometer Gauges Still Run Above Long-Term Averages

The Market Thermometer: Five of Seven Readings Still Run Hot

Morningstar's quarterly Markets Observer report tracks seven gauges — gold, the federal-funds rate, US stock market valuations, Brent crude, bitcoin, the US dollar and inflation-adjusted home prices — against their ranges over the past 20 years. As of June 30, 2026, five of the seven readings still sit above their long-term averages, even though the overall picture has become less alarming than it looked six months ago.

The most dramatic moves were in commodities and digital assets. Gold peaked above $5,400 an ounce in January 2026 after a roughly 70% surge in 2025, then fell almost 25% to about $4,026 by the end of June. Bitcoin traded below half its October 2025 peak of about $125,000 per coin. Brent crude, by contrast, climbed about 45% in the first half of 2026 on supply disruptions tied to the Iran war and blockades in the Strait of Hormuz, though it remains near only half its 2008 high.

Rates and valuations also remain stretched. The midpoint of the federal-funds target range stood at 3.64% on June 30, well above the near-zero levels of the post-financial-crisis era, and the three-month Treasury bill still yields slightly more than the latest annual inflation reading. The Morningstar US Market Index's P/E ratio is near the top of its 20-year range, and real US home prices are close to their all-time peak. The dollar index, while down about 7% in 2025, remains high in historical terms.

For investors, the report is a reminder that prices are still rich in most major markets after years of strong returns. The path ahead depends on whether corporate earnings justify high equity valuations, whether the Federal Reserve follows through on expected rate cuts in 2027 and 2028, and whether inflation stays near 3.5%.

A Metric-by-Metric Read of Where Prices Sit and What They Signal

Gold's Slide Shows Why Elevated Prices Carry Risk

Gold's retreat from its January peak is consistent with the mean-reversion pattern documented by researchers Campbell Harvey and Claude Erb. After real gold prices peaked in 1980 and again in 2011, long weak stretches followed. A nearly 25% drawdown from the January 2026 high brings gold closer to fair value, but it does not make the metal cheap by the standards of the past two decades. The drivers behind the rally — central bank de-dollarization and safe-haven demand — remain real, but so does the risk of further downside if real yields stay firm.

Cash and Bonds Offer a Return That Was Missing for Years

With the three-month Treasury bill yielding 3.86% against 3.5% inflation, short-term savings are still earning a positive real return. That is a notable shift from the era of zero interest-rate policy that followed the global financial crisis. The Fed's December 2025 cut has not yet changed the broader picture: fixed-income yields remain far above the levels that made bonds unattractive a decade ago. If Preston Caldwell's forecast of resumed cuts in 2027 and 2028 is right, locking in current yields on high-quality bonds could look prescient in hindsight.

US Equities Are Priced for Continued Earnings Growth

The Morningstar US Market Index's P/E has more than doubled from its post-crisis low of 10.19 and sits near the top of its 20-year range. Elevated multiples leave little room for further multiple expansion; future returns would have to come from earnings growth. That makes US stocks more sensitive to disappointment than they were when valuations were cheaper. The report's counterpoint is international stocks, which have rallied in 2025 and 2026 but still trade at lower valuations than US peers.

Oil and the Dollar Send Mixed Inflation Signals

Brent crude's 45% year-to-date gain reflects supply shocks rather than broad demand strength, and its price is still about half the 2008 peak. That makes energy a plausible inflation hedge rather than a sign of a new commodity supercycle. The dollar's decline in 2025, combined with continued central bank de-dollarization and federal debt at 124% of GDP, points to a weaker greenback over time — a scenario that would support non-US assets and commodities.

Bitcoin Remains a Speculative Asset With Policy and Rate Catalysts

Bitcoin's drop below half its October 2025 peak highlights its volatility, with past cycles showing declines of roughly 70% after speculative surges. The market lacks a fundamental anchor because bitcoin generates no cash flow, so price swings are driven by sentiment. The possible catalysts noted in the report — passage of the Digital Asset Market Clarity Act or a more dovish Fed in 2027 and 2028 — are policy- and liquidity-based, not evidence of intrinsic value.

Housing Wealth Creates Two Very Different Outcomes

Real US home prices sit near their all-time high, with the median Chicago-area home at $394,500 versus as low as $160,000 in 2012. Retirees who own homes have accumulated substantial equity that could fund downsizing or care costs. Younger households face the opposite problem: entry prices that outpace incomes, pushing them toward fixer-uppers, renting or longer savings periods. Both outcomes flow from the same data point — scarce housing supply and strong demand.

Practical Takeaways From the Latest Market Thermometer Data

For investors positioning their portfolios after the latest Market Thermometer readings, the data point to a few concrete considerations.

• Non-US equities still trade at lower valuations than the Morningstar US Market Index's near-record P/E, and an unhedged international-stock fund would benefit if the dollar continues the 7% slide it posted in 2025.
• Short-term yields are still positive in real terms — the three-month Treasury bill at 3.86% versus 3.5% inflation — but with the Fed expected to resume cuts in 2027 and 2028, locking in longer high-quality bond yields has a clearer rationale than it did a decade ago.
• Gold has fallen 25% from its January peak but remains above its long-term average; the mean-reversion evidence from 1980 and 2011 argues for treating it as a diversifying allocation rather than a momentum trade.
• Risk-tolerant investors may consider a small position in a broad-based commodities fund with energy exposure, given Brent's 45% gain this year and its distance from the 2008 peak.
• Bitcoin should be sized for total loss, not as a core holding; policy clarity from the stalled Digital Asset Market Clarity Act and Fed rate policy would be the conditions for any recovery to take hold.
• Retirees holding large home equity in a market near its real-price peak can weigh selling or borrowing against that equity, while younger buyers should plan for continued affordability pressure rather than a price collapse.