Ringraziamo Gian Luca Bocchi per averci segnalato questo interessante contributo apparso su Business Insider in lingua inglese scritto dache per la minuzia di grafici e dettagli riportati lasciamo in lingua originale. Buona lettura!
The stock market continues to set new highs, which is exciting and fun for those of us who own stocks.
I own stocks, so I'm certainly enjoying it.
I hope stocks continue to charge higher, but I can't find much data to suggest that they will. I only have a vague hope that the Fed will continue to pump air into the balloon and corporations will continue to find ways to cut more costs and grow their already record-high earnings.
Meanwhile, every valid valuation measure I look at suggests that stocks are at least 40% overvalued and, therefore, arelikely to produce lousy returns over the next 10 years.
Which valuation measures suggest the stock market is very overvalued?
These, among others:
- Cyclically adjusted price-earnings ratio (current P/E is 25X vs. 15X average)
- Market cap to revenue (current ratio of 1.6 vs. 1.0 average)
- Market cap to GDP (double the pre-1990s norm)
How lousy do these measures suggest stock returns will be over the next decade?
About 2.5% per year for the S&P 500 — a far cry from the double-digit returns of the past 5 years and the ~10% long-term average.
If stocks just park here for a decade and return 2.5% a year through dividends, that wouldn't be particularly traumatic. But stocks rarely "park." They usually boom and bust. So the farther we get away from average valuations, the more the potential for a bust increases.
So the higher we go, the less surprised I will be to see the stock market crash.
How big a crash could we get?
According to the aforementioned valuation measures, and the work of fund manager John Hussman of the Hussman Funds, 40%-55%.
A 50% crash would take the S&P 500 below 900 and the DOW below 8,000.
Is that going to happen?
No one knows.
And, just as importantly, no one knows when. (Valuation is unfortunately not helpful in predicting short- or intermediate-term market moves.)
But a careful study of history suggests that a crash is increasingly likely and that long-term stock returns from this level are likely to be crappy.
I've explained in detail here why I think the odds of a crash are increasing. And I've also explained why, despite this, I'm not selling my stocks. (In short, because I am a long-term investor, I am mentally prepared for a crash, and I am planning to ride out any crash, the same way I did with the 2008-2009 crash. And also because there isn't anything else compelling to invest in.).
Here's a chart from Mr. Hussman that lists many of the reasons why he (and I) are bracing for a crash. And, below that chart is an excerpt from Mr. Hussman's latest note, in which he explains the valuation concern in more detail.
And here's the excerpt:
Stock Valuations – an unrecognized bubble
Recently, as part of his book promotion tour, Alan Greenspan has hit the media circuit. His remarks include the assertion that stocks are still attractively valued, based on his estimate of the “equity risk premium.” See Investment, Speculation, Valuation, and Tinker Bell for a full discussion of the Fed Model, “equity risk premium” calculations, and a variety of far more reliable valuation methods that are tightly associated with subsequent S&P 500 total returns.
The simple fact is that on metrics that have been reliable throughout history, and even over the past decade, stock market valuations are obscene. Importantly, these same valuation metrics were quite optimistic about prospective market returns at the 2009 low.
As a side-note, one should not confuse the message with the messenger here. It’s no secret that my insistence on stress-testing our return/risk estimation methods against Depression-era data resulted in missed returns in the interim (2009-early 2010), but none of that reflects our valuation metrics, which indicated prospective 10-year S&P 500 total returns in excess of 10% annually at the time. The real concern in 2009 was that even after similar valuations were observed during the Depression, the stock market still went on to lose two-thirds of its value. So I’m quite open to criticism about my insistence on stress-testing (which I still believe was a fiduciary obligation given the events at the time). But one should be careful in concluding that this removes the ominous implications of present valuations.
On the basis of a wide variety of historically reliable fundamentals, we currently estimate 10-year S&P 500 nominal total returns of just 2.5% annually. Notably, the Shiller P/E (S&P 500 divided by the 10-year average of inflation-adjusted earnings) is now at 25. Prior to the late-1990’s bubble, the only time the Shiller P/E was higher was during three weeks in 1929 that accompanied the extreme peak of the market before stocks crashed. Meanwhile, the price/revenue ratio of the S&P 500 is presently 1.6 – a level that is double its pre-bubble norm, and even further above levels historically associated with bear market lows.
We observe similar extremes in other reliable measures that aren’t dominated by cyclical movements in profit margins. The apparently “reasonable” market valuations based on margin-sensitive fundamentals (e.g. forward operating earnings) implicitly assume that all of history can now be ignored: profit margins will no longer be highly cyclical; margins will no longer vary as the mirror image of deficits in combined household and government savings (see Taking Distortion at Face Value); and they will instead permanently remain more than 70% above their historical norm.
Aside from the fact that we can fully explain the present surplus of corporate profits as the mirror image of deficits in the household and government sectors, the other reason to focus on normalized earnings, cyclically-adjusted earnings, revenues, and other “smooth” fundamentals is simple: they are strikingly accurate guides across history. Another such measure is the ratio of stock market capitalization to nominal GDP, based on Federal Reserve Z.1 Flow of Funds data. Again, the present multiple is about double the historical pre-bubble norm.