Summary:
Dismal Earnings, Extreme Valuations The current earnings season hasn’t been very good so far. Companies continue to “beat expectations” of course, but this is just a silly game. The stock market’s valuation is already between the highest and third highest in history depending on how it is measured. Photo credit: Kjetil Ree Corporate earnings are clearly weakening, and yet, the market keeps climbing. The rally is a bit of a “all of worry” type of phenomenon actually, since many of the negatives are of course widely known. The S&P 500 and the Nasdaq Composite, daily. The vertical blue bar on the right shows the range we expected the rebound to be contained in – this has now clearly been exceeded. However, the technology sector continues to underperform the broader market in this rally – click to enlarge. After the immediate crash danger receded in February, we expected that a sizable rebound would be in the offing, but it is fair to say that the rebound has by now gone quite a bit further than we expected, if not by much yet. In fact, the S&P 500 Index is almost back at the level of early November as we write this. Note though that the Nasdaq continues to underperform in the current rally – which has been mainly driven by sectors that were previously weak.
Topics:
Pater Tenebrarum considers the following as important: Chart Update, Debt and the Fallacies of Paper Money, Featured, newsletter, stock market overvalued
This could be interesting, too:
Dismal Earnings, Extreme Valuations The current earnings season hasn’t been very good so far. Companies continue to “beat expectations” of course, but this is just a silly game. The stock market’s valuation is already between the highest and third highest in history depending on how it is measured. Photo credit: Kjetil Ree Corporate earnings are clearly weakening, and yet, the market keeps climbing. The rally is a bit of a “all of worry” type of phenomenon actually, since many of the negatives are of course widely known. The S&P 500 and the Nasdaq Composite, daily. The vertical blue bar on the right shows the range we expected the rebound to be contained in – this has now clearly been exceeded. However, the technology sector continues to underperform the broader market in this rally – click to enlarge. After the immediate crash danger receded in February, we expected that a sizable rebound would be in the offing, but it is fair to say that the rebound has by now gone quite a bit further than we expected, if not by much yet. In fact, the S&P 500 Index is almost back at the level of early November as we write this. Note though that the Nasdaq continues to underperform in the current rally – which has been mainly driven by sectors that were previously weak.
Topics:
Pater Tenebrarum considers the following as important: Chart Update, Debt and the Fallacies of Paper Money, Featured, newsletter, stock market overvalued
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Dismal Earnings, Extreme Valuations
The current earnings season hasn’t been very good so far. Companies continue to “beat expectations” of course, but this is just a silly game. The stock market’s valuation is already between the highest and third highest in history depending on how it is measured. Corporate earnings are clearly weakening, and yet, the market keeps climbing. The rally is a bit of a “all of worry” type of phenomenon actually, since many of the negatives are of course widely known. provided by John Hussman, which measures stock market valuation as the ratio of non-financial market capitalization to national non-financial gross value added, including estimated foreign revenues (note: due to stronger internals, Dr. Hussman is currently not strongly bearish in the short term).
In terms of this measure, the market has only been more overvalued than today at the peaks of 1929 and 1999/2000. 1937 came close as well. |
The Cause of Nominal Price Gains
First of all we should note that in spite of the phenomenal advance between 2009 and early 2015, in real terms buy & holders of a broad market benchmark index have not much to write home about over the past 16 years. They are basically treading water (if they had the nerve to hold through two of the biggest bear markets in history that is). Nominal gains in stock prices are largely a function of monetary inflation. At the moment, there is still plenty of monetary inflation in the US and Europe, and it is not certain for how long its lagged effects will affect stocks. The level and trend of stock prices is actually not an indicator of the economy’s health. It is primarily an indicator of money supply inflation, even though the correlation is largely a long term phenomenon, and subject to significant leads and lags, which in turn are greatly influenced by investor perceptions.
US money supply TMS-2 and the associated asset price booms since the late 1980s – click to enlarge. |
TMS-2, annual growth rate – click to enlarge.  
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