Stocks have stalled in recent days. And that’s no surprise given the Fed is almost certain to raise interest rates again on Wednesday.
Yet widen the market lens to a just a few weeks ago, and you’ll see a string of record highs on the major indices. These highs are largely inspired by a combination of optimism for the future, and hope that the pro-growth policies of President Trump will be enacted.
That bullish sentiment has several market-watchers, myself included, worried about unsustainable valuations.
Historically speaking, valuations on the S&P 500 are on the high side at about 17.5 X 2018 EPS of $135. Yet one well-known market-watcher thinks that high valuations, and the metrics that tend to go along with them, represent the most overvalued markets in history.
And yes, that included such precarious times as 2007, 2000 and even 1929!
So, who is that bearish right now, and what’s the rationale behind that sentiment?
The view belongs to John Hussman of the Hussman Funds.
Hussman’s views are widely read via his usually intricate and detailed weekly commentary.
And while I make it a habit of checking out Hussman’s view on a regular basis, I first saw his latest market assessment in a popular article at MarketWatch by columnist Brett Arends.
Here’s the money quote from Hussman (dated March 13) that encapsulates his assessment of where this market is right now:
Presently, we observe the broadest market valuation extreme in history, with the steepest median valuations on record, and the most reliable capitalization-weighted measures within a few percent of their 2000 peaks.
In addition to extreme valuations, bullish sentiment, and consumer confidence, market action has deteriorated in interest-sensitive sectors, and internal dispersion has been widening more broadly.
As of Friday, more than one-third of stocks are already below their 200-day moving averages. Indeed, even with the major indices near record highs, more NYSE-traded issues set new 52-week lows last week than new highs, while credit spreads abruptly widened.
That’s a lot of food for thought packed into one passage, so let me unpack it a bit further.
First, in terms of valuation, Hussman is correct that median valuations are indeed very steep. That doesn’t mean they can’t get a lot steeper. But it does suggest that, historically speaking, a reversion to the mean is likely to occur.
When it comes to valuation, that can happen by either a decline in stock prices or a rise in earnings per share due to economic growth.
And while both things could happen, I suspect that the more-probable outcome here, at least short term, is a decline in stock prices (possibly quite sharp) that brings valuations back in line.
|It may not yet be time to write the bull market’s obituary. But you may want to consider adding some "life insurance" via buying puts or inverse ETFs to prepare for a bearish turn.|
As for the additional factors — such as record-high bullish sentiment indicators, consumer confidence numbers and a decline in interest-rate sensitive sectors — here too Hussman cannot be disputed.
These factors are so-called "contrarian indicators." Meaning, they tend to get high right before a market pullback, and after stocks have already made a sustained break to the upside.
Finally, the market breadth here (number of stocks advancing vs. declining) is not indicative of a roaring bull market with plenty of gas left in the tank.
Instead, the fact that more stocks made 52-week lows last week than they did new highs is a sign that this rally is living on borrowed time.
The one intangible, however, is the pro-growth direction of the Trump administration.
If … and right now, it seems like a big "if" … the market gets all the fiscal, regulatory and tax stimulus it wants — i.e., if Obamacare repeal/replace gets passed, more regulatory reform is enacted, corporate taxes drop to 15% from the current 35% level, and if there is progress on infrastructure spending — then those high valuations will cease to be so high.
Now, if that seems like a lot of "ifs" to you, then we agree.
We’re clearly at an important crossroads in the market. And I want to make sure you have the information you need to deal with whatever happens next.
So if you’re worried about a new market crash …
If you are unsure what asset classes to be in right now …
Or if you simply want to go for solid returns with far less time, effort, and worry …
What do you think about Hussman’s assessment? Are we likely headed for a correction to bring valuations back in line? I’d love to know what you think about this, or any of the recent issues we’ve covered in the Afternoon Edition. And, letting me know is easy. All you have to do is leave me a comment on our website or send me an e-mail.
Happy Pi Day! Whether you’re celebrating with a pizza pie or the dessert variety, we hope you have all the ingredients you need to stay out of Winter Storm Stella’s path.
Wall Street was open for business today. But stocks felt the chill of the forecast for snow, sleet and ice, coupled with anticipation as the FOMC’s two-day meeting kicked off in D.C. The broader market indices ended Tuesday in the negative, with the S&P 500 falling 0.3%.
• Got $3.14? ABC News has a nice roundup of deals that are good today only (3/14) if you’re looking for some cheap ways to celebrate Pi Day.
• Oil fell for a seventh session to a three-month low of $47.72 (-1.4%). This after OPEC reported rising stockpiles as a handful of countries continue to produce above their promised targets.
• Energy stocks were the big losers of the day, with the Energy Select Sector SPDR (XLE) falling 1.1%.
• With thousands of flights canceled across the U.S., airline stocks took a hit. The U.S. Global Jets ETF (JETS) fell 2.3%.
Good luck and happy investing,
Uncommon Wisdom Daily