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Market Remains Overvalued - dshort - Advisor Perspectives

Market Remains Overvalued - dshort - Advisor Perspectives | Financial Markets, Economy | Scoop.it

Here is a summary of the four market valuation indicators we update on a monthly basis.



The Crestmont Research P/E Ratio
The cyclical P/E ratio using the trailing 10-year earnings as the divisor
The Q Ratio, which is the total price of the market divided by its replacement cost
The relationship of the S&P Composite price to a regression trendline
What? Me worry?'s insight:
regardless of the exact valuation measure:

still crazily high valuations
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Market Remains Overvalued - dshort - Advisor Perspectives

Market Remains Overvalued - dshort - Advisor Perspectives | Financial Markets, Economy | Scoop.it

Here is a summary of the four market valuation indicators we update on a monthly basis.



The Crestmont Research P/E Ratio
The cyclical P/E ratio using the trailing 10-year earnings as the divisor
The Q Ratio, which is the total price of the market divided by its replacement cost
The relationship of the S&P Composite price to a regression trendline
What? Me worry?'s insight:
correction?

mmhh, hardly noticeable so far..
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Measuring the Bubble - Hussman Funds

Measuring the Bubble - Hussman Funds | Financial Markets, Economy | Scoop.it
I expect the S&P 500 to lose approximately two-thirds of its value over the completion of this cycle. My impression is that future generations will look back on this moment and say "... and this is where they completely lost their minds." As I’ve regularly noted in recent months, our immediate outlook is essentially flat neutral for practical purposes, though we’re partial to a layer of tail-risk hedges.
What? Me worry?'s insight:
Last week, the U.S. equity market climbed to the steepest valuation level in history, based on the valuation measures most highly correlated with actual subsequent S&P 500 10-12 year total returns, across a century of market cycles.

the “errors” between actual market returns and those that one would have expected (on the basis of reliable valuation measures 12-years earlier) are tightly correlated with by cyclical fluctuations in consumer confidence... Put simply, extreme overvaluation emerges because investors feel exuberant over some portion of the market cycle, not because prices actually belong at those extremes. Likewise, extreme undervaluation emerges because investors feel risk-averse.

The main driver of market returns over shorter segments of the market cycle is the purely psychological inclination of investors toward speculation or risk-aversion.

Looking at the economy as a whole, the 2.5% real GDP growth observed in 2017 featured 1.2-1.4% growth in employment (depending on whether one uses the household or establishment survey), implying productivity growth of about 1.1-1.3%, which is about half the historical norm... At a 4.1% unemployment rate and labor force growth now down to about 0.5%, the baseline expectation for real GDP growth in the coming years remains well below 2% (0.5% labor force growth plus likely productivity growth of scarcely 1% annually).

Think of valuations three times their appropriate level as measuring “potential energy.” Similarly, think of market internals as helping to identify the point that this potential energy is most likely to be transformed into “kinetic energy” – that is, actual motion in a specific direction.

unless we allow for the slope of the current market advance to become quite literally infinite, it’s impossible to closely fit the current price advance without setting the “finite-time singularity” – the point at which instability typically emerges – within a few days of the present date. Notably, the singularity is not the date of a crash. Rather, it’s the point where the pitch of the advance reaches an extreme, which may simply be an inflection point

the steepening pitch of this ascent – coupled with record valuation extremes, record overbought extremes, and the most lopsided bullish sentiment in over three decades – now produces the most extreme “overvalued, overbought, overbullish” moment in history. In prior cycles across history, similar syndromes were either joined or quickly followed by deterioration in market internals.

My impression is that future generations will look back on this moment and say “… and this is where they completely lost their minds.”
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JPMorgan: "Global Market Momentum Just Hit Extreme Levels; Profit-Taking Imminent"

JPMorgan: "Global Market Momentum Just Hit Extreme Levels; Profit-Taking Imminent" | Financial Markets, Economy | Scoop.it
The market is at "levels where momentum-based investors would begin to take profit on their positions."
What? Me worry?'s insight:
profit taking? naaahh, US stocks will go up further... crazy!
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Stock Market Optimism Hits Highest Level Since Crash Of 1987; 8 in 10 Expect Higher Stocks In Q1

Stock Market Optimism Hits Highest Level Since Crash Of 1987; 8 in 10 Expect Higher Stocks In Q1 | Financial Markets, Economy | Scoop.it
"In 1987 stocks crashed a few months after that. A repeat of that scenario suggests potential danger, especially as the market moves become parabolic. Those recently holding cash appear to be chasing a rallying market, adding fuel to the fire."

 
What? Me worry?'s insight:
highest investor optimism
hightest equity net exposure

so markets HAVE to go up...
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IBM "Beats" Thanks To Record Low Tax Rate

IBM "Beats" Thanks To Record Low Tax Rate | Financial Markets, Economy | Scoop.it
IBM once again tried to fool shareholders with the oldest accounting trick in the tax book. And, once again, it failed.
What? Me worry?'s insight:
IBM first increase in Y/Y revenue in 22 quarters / more than 5 years

turnaround finally arrived?
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Dow Futures Near 26k As US Stocks Reach Most-Overbought In Over 120 Years

Dow Futures Near 26k As US Stocks Reach Most-Overbought In Over 120 Years | Financial Markets, Economy | Scoop.it
This bull market neve
What? Me worry?'s insight:
US stock market most overbought EVER

so most probably a good time to add...
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Market Remains Overvalued - dshort - Advisor Perspectives

Market Remains Overvalued - dshort - Advisor Perspectives | Financial Markets, Economy | Scoop.it

Here is a summary of the four market valuation indicators we update on a monthly basis.



The Crestmont Research P/E Ratio
The cyclical P/E ratio using the trailing 10-year earnings as the divisor
The Q Ratio, which is the total price of the market divided by its replacement cost
The relationship of the S&P Composite price to a regression trendline
What? Me worry?'s insight:
terribly expensive... and getting even more expensive
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Three Delusions: Paper Wealth, a Booming Economy, and Bitcoin - Hussman Funds

Three Delusions: Paper Wealth, a Booming Economy, and Bitcoin - Hussman Funds | Financial Markets, Economy | Scoop.it
The reason that delusions are so hard to fight with logic is that delusions themselves are established through the exercise of logic. Responsibility for delusions is more likely to be found in distorted perception or inadequate information.
What? Me worry?'s insight:
Delusions are best understood not as deficiencies in logic, but rather as explanations that have been logically reached on the basis of distorted inputs.

delusions appear to reflect not a defect in reasoning itself, but a defect “which is best described as a data-gathering bias

1929 bubble: Keep in mind that yes, the economy was strong, business was booming, and money was easy. The problem was that investors stopped thinking about stocks as a claim on a very, very long-term stream of discounted cash flows. Valuations didn’t matter. It was enough that the economy was expanding. It was enough that earnings were rising. Put simply, the trend of earnings and the economy, not the actual level of valuation, became the justification for buying stocks.

2000 bubble: The 2000 tech bubble featured the same process in a slightly different form. The inputs and premises that investors observed were valid, but incomplete. Economic growth and employment were strong, and money was easy. The internet did indeed have tremendous growth prospects. But again, as the advance became more speculative, investors largely ignored the impact of their own speculation in producing that advance.

2008 bubble: The mortgage bubble leading up to the global financial crisis was built on the same sort of distorted inputs, this time fueled by the insistence of the Federal Reserve to hold interest rates at just 1% after the tech collapse. As yield-starved investors looked for relatively safe alternatives to low-yielding Treasury securities, they turned to mortgage securities, which had to-date never experienced major losses.

every security is an asset to the holder, and an equivalent liability to the issuer...What actually matters, in aggregate, is the stream of cash flows... securities are not net economic wealth. They are a claim of one party in the economy – by virtue of past saving – on the future output produced by others.

Presently, we estimate negative total returns for the S&P 500 over the coming 12-year period. Among the valuation measures we find best correlated with actual S&P 500 total returns in market cycles across history, the S&P 500 is currently more than 2.8 times its historical norms. Importantly, this estimate of overvaluation is not somehow improved by accounting for the level of interest rates. The reason is that interest rates and economic growth rates are highly correlated across history. Lower interest rates only “justify” higher market valuations provided that the trajectory of future cash flows is held constant. But if interest rates are low because growth rates are also low (which we’ll establish in the next section below), no valuation premium is “justified” at all. So even given the level of interest rates, we expect a market loss of about -65% to complete the current speculative market cycle.

Among the valuation measures we find best correlated with actual S&P 500 total returns in market cycles across history, the S&P 500 is currently more than 2.8 times its historical norms. Importantly, this estimate of overvaluation is not somehow improved by accounting for the level of interest rates. The reason is that interest rates and economic growth rates are highly correlated across history. Lower interest rates only “justify” higher market valuations provided that the trajectory of future cash flows is held constant. But if interest rates are low because growth rates are also low (which we’ll establish in the next section below), no valuation premium is “justified” at all. So even given the level of interest rates, we expect a market loss of about -65% to complete the current speculative market cycle.

A second delusion, unleashed by exuberance over the prospect of tax reductions, is the notion that U.S. growth has even a remote likelihood of enjoying sustained 4% real growth in the coming years.

The central feature of both the Reagan and Kennedy tax cuts was that they were enacted at points that provided enormous slack capacity for growth. In particular, the Reagan cuts were enacted at a point where the unemployment rate had hit 10%, and an economic expansion was likely simply by virtue of cyclical mean-reversion. The Kennedy tax cuts (which brought the top marginal tax rate down from 90%) occurred as baby-boomers were just entering the labor force, again providing enormous capacity for growth.

Presently, the situation is the reverse. The structural drivers of U.S. economic growth are likely to constrain real U.S. GDP growth to less than 2% annually in the coming years, even in the unlikely event that corporate tax cuts encourage increased gross domestic investment. Corporate profits are already near record levels.

add the current 0.4% growth rate in the civilian labor force to 0.6% growth in productivity, and you get the current “structural” growth rate of the U.S. economy; that is, the growth rate we would observe in the absence of changes in the unemployment rate. That structural growth rate has deteriorated to just 1% annually.

every market cycle in history has ended at valuations consistent with prospective future market returns of at least 8% annually, and more often well above 10% annually. Even if the future will be permanently different, and even 8% return prospects will never ever be seen again, the prospect of negative 12-year returns is likely to be resolved in far fewer than 12 years (as similarly poor prospects were within 2 years of the 2000 market peak).
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Liesman Asks Yellen: "Is The Fed Worried By The Market Going Up Triple Digits Every Day?"

Liesman Asks Yellen: "Is The Fed Worried By The Market Going Up Triple Digits Every Day?" | Financial Markets, Economy | Scoop.it
''There is nothing flashing red there or possibly even orange,'' on asse
What? Me worry?'s insight:
elevated? as expensive as in 1999!
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THE DAILY EDGE (4 December 2017) - Edge and Odds

THE DAILY EDGE (4 December 2017) - Edge and Odds | Financial Markets, Economy | Scoop.it
Bob Farrell’s wisdom:

1. Markets tend to return to the mean over time When stocks go too far in one direction, they come back. Euphoria and pessimism can cloud people’s heads. It’s easy to get caught up in the heat of the moment and lose perspective.

2. Excesses in one direction will lead to an opposite excess in the other direction Think of the market baseline as attached to a rubber string. Any action to far in one direction not only brings you back to the baseline, but leads to an overshoot in the opposite direction.

3. There are no new eras — excesses are never permanent Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots. As the fever builds, a chorus of “this time it’s different” will be heard, even if those exact words are never used. And of course, it — Human Nature — never is different.

4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways Regardless of how hot a sector is, don’t expect a plateau to work off the excesses. Profits are locked in by selling, and that invariably leads to a significant correction — eventually. 

5. The public buys the most at the top and the least at the bottom That’s why contrarian-minded investors can make good money if they follow the sentiment indicators and have good timing.

6. Fear and greed are stronger than long-term resolve Investors can be their own worst enemy, particularly when emotions take hold.

7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names Hence, why breadth and volume are so important. Think of it as strength in numbers. Broad momentum is hard to stop, Farrell observes. Watch for when momentum channels into a small number of stocks (“Nifty 50” stocks).

8. Bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend

9. When all the experts and forecasts agree — something else is going to happen As Stovall, the S&P; investment strategist, puts it: “If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?” Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.

10. Bull markets are more fun than bear markets
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Brief Observations: Distinctions Matter - Hussman Funds

Brief Observations: Distinctions Matter - Hussman Funds | Financial Markets, Economy | Scoop.it
Last week, the uniformity of market internals shifted to an unfavorable condition. During the advancing half-cycle since 2009, zero interest rates encouraged speculation (and maintained favorable market internals) long after extreme overvalued, overbought, overbullish conditions emerged. But distinctions matter. Once the uniformity of market internals - the most reliable measure of speculation itself - is knocked away, those extremes are still likely to matter with a vengeance.
What? Me worry?'s insight:
Last week, the uniformity of market internals shifted to an unfavorable condition. This classification is based on current, observable market conditions. Historically, our measures of internals have shifted about twice a year, on average.... shifts us back to a negative market outlook.

A century of market evidence demonstrates that the U.S. stocks have lost substantial value in periods where market internals have been unfavorable. Indeed, when unfavorable internals have emerged in the presence of overvalued, overbought, overbullish conditions, the S&P 500 has lost value, on average, even during the advancing half-cycle since 2009.
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Market Remains Overvalued - dshort - Advisor Perspectives

Market Remains Overvalued - dshort - Advisor Perspectives | Financial Markets, Economy | Scoop.it

Here is a summary of the four market valuation indicators we update on a monthly basis.



The Crestmont Research P/E Ratio
The cyclical P/E ratio using the trailing 10-year earnings as the divisor
The Q Ratio, which is the total price of the market divided by its replacement cost
The relationship of the S&P Composite price to a regression trendline
What? Me worry?'s insight:
US stocks very expensive, but who cares?
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The Arithmetic of Risk

The Arithmetic of Risk | Financial Markets, Economy | Scoop.it
In my view, the idea that higher risk means higher expected return is one of the most dangerous and misunderstood propositions in the financial markets. The reason it’s dangerous is that it ignores the central condition: “provided that one is choosing between portfolios that all maximize expected return per unit of risk.” Presently, the S&P 500 is both a high risk and a low expected return asset.
What? Me worry?'s insight:
On February 2nd, our measures of market internals clearly deteriorated, shifting market conditions to a combination of extreme valuations and unfavorable market internals, coming off of the most extremely overextended conditions we’ve ever observed in the historical data. At present, I view the market as a “broken parabola” – much the same as we observed for the Nikkei in 1990, the Nasdaq in 2000, or for those wishing a more recent example, Bitcoin since January.

Observing the sudden collapses of fringe bubbles today, including inverse volatility funds and Bitcoin, my impression is that we’re actually seeing the early signs of risk-aversion and selectivity among investors.

With market internals now unfavorable, following the most offensive “overvalued, overbought, overbullish” combination of market conditions on record, our market outlook has shifted to hard-negative.... For now, buckle up.

Recently, this ratio climbed to the highest level in history, exceeding the peaks observed in 2000 and 2007. Based on other reliable measures for which historical data is available, present market valuations also exceed those observed at the 1929 peak.

even a run-of-the-mill completion to the present market cycle can be expected to take the S&P 500 between 45% and 65% lower

Presently, the S&P 500 is both a high risk and a low expected return asset.

even assuming a 6% growth rate in fundamentals, the same arithmetic above implies expected 5-year S&P 500 total returns averaging -12.2% annually, with 10-year total returns averaging -2.4% annually. Those estimates, in my view, are just about right.
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The Dollar - From Bohemia To Bust

The Dollar - From Bohemia To Bust | Financial Markets, Economy | Scoop.it
"Virtually no investor studies history and the few who do always think it is different today. The most important lesson is that people never learn...But history has time and time again turned hubristic know-it-alls into humbled has-beens."
What? Me worry?'s insight:
US stocks are incredibly expensive

even if it feels that markets only can and have to go up, they can correct

in bad cases as in the 1930ies it took 26 years to get back to 1929 level!
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Netflix Explodes To Record Highs After Smashing Subscriber Expectations, Will Burn Up To $4BN In 2018

Netflix Explodes To Record Highs After Smashing Subscriber Expectations, Will Burn Up To $4BN In 2018 | Financial Markets, Economy | Scoop.it
"we’re growing faster than we expected, which allows us to invest more in original content than we had planned, so our FCF will be around negative $3B-$4B in 2018."
What? Me worry?'s insight:
strong growth: YES
good products: YES

triple digit PE: NO, not worth it, sell today at 250
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The US Equity Market Has Never Done This Before

The US Equity Market Has Never Done This Before | Financial Markets, Economy | Scoop.it
Never... is a very lon
What? Me worry?'s insight:
nice charts.. but nevermind, US stock markets will go up
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US Banks Lose Over $1 Billion On Steinhoff Collapse

US Banks Lose Over $1 Billion On Steinhoff Collapse | Financial Markets, Economy | Scoop.it
It's not just the ECB that was humiliated  for holding Steinhoff securities: so were all major US banks, which have collectively lost over $1 billion on their Steinhoff exposure.
What? Me worry?'s insight:
370 Mio USD loss just for Citigroup

Steinhoff Collapse might weigh heavily...
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When Speculation Has No Limits - Hussman Funds

When Speculation Has No Limits - Hussman Funds | Financial Markets, Economy | Scoop.it
Here we are, nearly three times the level at which I expect the S&P 500 to complete this cycle. Yet our immediate outlook remains neutral (though tail-risk hedges remain appropriate). It’s essential to distinguish between valuations, which have long-term implications, and market internals, which have implications for shorter segments of the market cycle.
What? Me worry?'s insight:
most bullish extreme in over 30 years, with 64.4% of investment advisors bullish and just 13.5% bearish

Despite the far more extreme combination of conditions at present, our immediate market outlook remains neutral, not negative

“overvalued, overbought, overbullish”

In hindsight, the stupidest thing I ever did as a professional investor was to imagine that there was some limit to the stupidity of Wall Street. That comment may not seem terribly humble, but as a dear friend and mentor once told me “There’s a difference between humility and false humility.”

“On Wall Street, urgent stupidity has one terminal symptom, and it is the belief that money is free.” Here we are again.

The most historically reliable valuation measures we identify now stand more than 2.9 times the level we expect them to revisit over the completion of the current market cycle. Yes, that implies a seemingly preposterous loss of over -65% in the S&P 500, most likely over the coming 2-3 years.

valuations appear to be irrelevant when investors are inclined toward speculation, and then matter with a vengeance when that psychological disposition gives way to risk-aversion.
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Global Stocks Are The Most Overbought Since Right Before 1987 Bloodbath | Zero Hedge

Global Stocks Are The Most Overbought Since Right Before 1987 Bloodbath | Zero Hedge | Financial Markets, Economy | Scoop.it
While world stocks are on their longest streak (without a 5% correction) in history, the last few weeks have seen that exuberance accelerate with MSCI World now at its most 'overbought' since the summer of 1987... and we know what happened next.
What? Me worry?'s insight:
stocks only can go up! can they?
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Survival Tactics for a Hypervalued Market - Hussman Funds

Survival Tactics for a Hypervalued Market - Hussman Funds | Financial Markets, Economy | Scoop.it
The essential survival tactic for a hypervalued market, and its resolution ahead, is to recognize that market valuations can experience breathtaking departures from historical norms for extended segments of the market cycle, so long as shorter-term conditions contribute to speculative psychology rather than risk-averse psychology. Yet those departures matter enormously for long-term returns.
What? Me worry?'s insight:
if Wall Street believes that stock prices could advance further because investors temporarily have a speculative bit in their teeth, and that they care more that the environment “feels good” than about any careful evaluation of long-term investment prospects, we have no strenuous objection to that argument... On the other hand, if Wall Street believes that current valuations are actually “justified,” that 10-12 year S&P 500 total returns are likely to be meaningfully positive, or that the S&P 500 will avoid a collapse on the order of -65% over the completion of the current market cycle, my view is that these beliefs are strenuously at odds with the evidence from a century of market history.

The “hinge” that distinguishes an overvalued market that continues to advance from an overvalued market that drops like a rock is purely psychological – it’s the preference of investors toward speculation or risk-aversion,

we view market valuations as obscene, with negative expected S&P 500 total returns over the coming 10-12 year period, and a probable interim loss on the order of -65% over the completion of the current market cycle. Still, in the absence of further deterioration and dispersion in market internals, our immediate market outlook is actually rather neutral... a negative market outlook should wait on further internal deterioration.

the main reason that market returns periodically deviate from value-based expectations is that investors temporarily feel good, or that they temporary feel pessimistic.


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St. Louis Fed Promotes the Mathematically Impossible - Mish Talk

St. Louis Fed Promotes the Mathematically Impossible - Mish Talk | Financial Markets, Economy | Scoop.it
Negative interest rates cannot push people into more stimulating investments.
No matter how negative the rate, someone has to hold every treasury bond and someone has to hold every dollar in circulation.
What? Me worry?'s insight:
Negative interest rates cannot push people into more stimulating investments.

No matter how negative the rate, someone has to hold every treasury bond and someone has to hold every dollar in circulation.
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Market Remains Overvalued - dshort - Advisor Perspectives

Market Remains Overvalued - dshort - Advisor Perspectives | Financial Markets, Economy | Scoop.it

Here is a summary of the four market valuation indicators we update on a monthly basis.



The Crestmont Research P/E Ratio
The cyclical P/E ratio using the trailing 10-year earnings as the divisor
The Q Ratio, which is the total price of the market divided by its replacement cost
The relationship of the S&P Composite price to a regression trendline
What? Me worry?'s insight:
US stocks are very expensive - what else
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Navigating the Speculative Id of Wall Street - Hussman Funds

Navigating the Speculative Id of Wall Street - Hussman Funds | Financial Markets, Economy | Scoop.it
Valuations are understood best not by trying to “justify” or dismiss current extremes, but by recognizing that across history, the speculative inclinations of investors have periodically allowed valuations to depart dramatically from appropriate norms, at least for limited segments of the complete market cycle.
What? Me worry?'s insight:
At present, the valuation measures that we find best correlated with actual subsequent S&P 500 total returns are at the most offensive levels in history, matching or eclipsing the 1929 and 2000 extremes.

With our measures of market internals deteriorating in recent weeks, even that factor is sputtering... Despite the late-November advance in the major indices, the condition of market internals remains unfavorable on our measures.

The problem, as the economist Rudiger Dornbusch once observed, is that “the crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.”

While long-term market returns are driven almost exclusively by valuations, investment returns over shorter segments of the market cycle are highly dependent on investor psychology, particularly the inclination of investors toward speculation or risk-aversion.

The advancing half-cycle since 2009 was strikingly different. Amid the novelty of quantitative easing and zero interest rates, investors continued to speculate long after the most extreme overvalued, overbought, overbullish syndromes emerged... market internals have to deteriorate explicitly before adopting a negative market outlook... our adapted discipline requires explicit deterioration in market internals before adopting a negative market outlook.

One has to tolerate a certain amount of cognitive dissonance to recognize that the S&P 500 is now 2.8 times the level at which it is likely to complete this market cycle, and yet allow for the possibility that investors could again take up the speculative bit (which we would infer from market internals), and drive valuations to even further extremes.

the average effective corporate tax rate is already just 20% in the United States... Even if corporate taxes were cut in half, the bump to after-tax cash flows would be just 0.90/0.80-1 = 12.5%. So even if that tax cut was permanent, the present value of the expected addition to future cash flows would only “justify” a 12.5% increase in stock prices. Far more has been priced into stocks in recent months alone.

corporate profits aren’t a binding constraint on anything here. A larger surplus won’t be used for economic activity, but for financial transactions. In full equilibrium, I expect that the additional cash flows from corporate tax cuts will, directly or indirectly, be used to buy fresh Treasury debt. The effect of corporate tax cuts will end up being a bookkeeping entry: the public will give tax breaks to the super-wealthy, so the super-wealthy can lend it back to the public.

recognize the potential for the yawning gap between price and value to snap shut, particularly in periods where deteriorating market internals suggest a shift of investor preferences from speculation to risk-aversion.
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This Time Is Different, But Not How Investors Imagine It Is Different - Hussman Funds

This Time Is Different, But Not How Investors Imagine It Is Different - Hussman Funds | Financial Markets, Economy | Scoop.it
Encouraged by the novelty of zero-interest rates, not even the most extreme “overvalued, overbought, overbullish” conditions have been enough to derail the speculative inclinations of investors. Yet in every other way, this speculative episode is simply a more extreme variant of others that have come before it.
What? Me worry?'s insight:
we presently expect the average annual total return of the S&P 500 over the coming 10-12 year horizon to be negative. Market valuations, on these measures, presently approach or exceed the 1929 and 2000 extremes, placing U.S. equity market valuations at the most offensive levels in history. Indeed, with median valuations on these measures now more than 2.7 times their historical norms, there is strong reason to expect a market loss on the order of -63% over the completion of the current market cycle

insist on asking two basic questions:
1) how closely are those alternative measures correlated with actual subsequent market returns in market cycles across history?
2) is the fundamental being used a plausible “sufficient statistic” for the very, very long-term cash flows that stocks will deliver to investors over time?

interest rates and economic growth rates go hand in hand over extended periods of time.

periods of rapid GDP growth have invariably emerged from two conditions: high unemployment, and reasonably balanced trade (a balanced or surplus position in the U.S. current account).

elevated corporate profit margins are the precise mirror-image of depressed labor compensation. The U.S. corporate sector isn’t profitable because it has become vastly more productive, but rather because the aftermath of employment losses during the global financial crisis allowed the distribution of income to become markedly inequitable. That situation is unlikely to be permanent in an environment of constrained labor force growth and 4.1% unemployment.

Despite these brutal long-term and full-cycle expectations for the S&P 500, our immediate outlook is actually quite neutral.

Those three primary considerations: 1) valuation, 2) the uniformity or divergence of market internals, and 3) the presence or absence of “overvalued, overbought, overbullish” extremes, served us remarkably well in complete market cycles

In our view, there’s no evidence of deterioration in the reliability of the most historically useful valuation measures.

what’s “different” about “this time” is purely psychological, driven by:
1) the novelty of central bank interventions and the recent experience of zero-interest rates, which encouraged the belief that there was no alternative to buying riskier assets, no matter the price;
2) the fallacy that low interest rates “justify” arbitrarily high valuations even if economic growth rates are commensurately low, and;
3) the belief that elevated profit margins (largely a creature of depressed wage growth following extreme job losses in the global financial crisis) will be a permanent feature of the economic landscape, despite an unemployment rate that now stands at just 4.1%.

If the market advances further, it will not be evidence that valuations don’t matter, but only that they temporarily don’t matter

The chart below shows the median price/revenue ratio of S&P 500 component stocks, which set yet another record high in the week ended November 3, 2017, and now stands more than 50% above the 2000 extreme.
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