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(edited)

Very little to the upside.  Very much to the downside.

Macro Valuation Metrics  Via Global Macro Monitor

Lots of incoming over our S&P Shooting Star post, most of which can mostly be summed up to the effect, “Why so bearish?” Seriously? Our predisposition to the market is always anchored in time tested valuation metrics, which are hard to manipulate. That is why we like market capitalization deflated by some macro variables, such as nominal GDP or wages. Micro measures, such as Price-to-Earnings are way too distorted by buybacks and can be easily manipulated by CFOs, who play around with variables such as depreciation or loss reserves.

Our two favorite are  1) market cap-to-GDP,  which, according to Warren Buffet is,  “the best single measure of where valuations stand at any given moment.” Take a look at the following chart and you will understand why the Oracle of Omaha is sitting on a record $122 billion stockpile of cash,  2) the number of hours of work needed to buy the S&P500, not a perfect valuation measure but does track our other favorite quite well. The average person, making the average salary is not a big holder of stocks but the metric does give a heads up when the stock market becomes divorced from the underlying economic trend.

Take a look at the data and you decide, folks. Keep in mind, the charts are ratios, not price indices, and can’t continue to rise from lower left to upper right,  forever. Turn off the talking heads on bubble vision and #FinTwit, who will find it difficult to interpret the following charts because their salaries and year-end bonuses depend on their not understanding them or are incentivized to dismiss them outright.

valuation-metric_buffet-indicator.png

Source:  Advisor Perspectives

valuation-metric_sp-hours.png

Run Forest Run

Can markets, once again, convince themselves that historic valuations no longer matter? Possibly,  but they will need a theme to fuel the delusion. It could come in the form QE Forever, which we don’t think is very probable. That jig is almost up and any further rise in inflation will put a stake through its heart. Artificial Intelligence? This is the one to watch, which will be a major disruptive force for decades to come. The theme goes something like this. Companies can lay off all their workers and replace them with machines and algorithms, which will inflate margins to infinity and beyond.

The problem with this scenario is it would crush aggregate demand and economic growth. The geniuses are trying to find a balance and, thus far, have come up with concepts such as Universal Basic Income (UBI) and Modern Monetary Theory (MMT). Stay tuned. Wake us up after the above charts regress to their means, about 40 percent lower.

https://www.zerohedge.com/markets/how-far-can-stock-market-run

Edited by DayTrader

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What you are seeing in this stock-market run-up is a scramble for returns, specifically returns on capital.  The typical marker for Returns has been the long-term bond, such as the ten-year T-bill.  Unfortunately those returns have largely collapsed, and in Europe at least it is starting to shape up to zero or even negative returns.  The last time that Europe had a sustained period of negative returns to capital was in about 1962,  when the Swiss Banks were charging 2% of capital deposited for the privilege of having Germans park their wealth in Swiss Banks.  You paid them, not they paid you.  The underlying driver that time was the threat of Russian invasion across the North German Plain, where the Russian army could drive tanks to Hamburg in three days.  That prospect drove the Germans squirrelly. 

Today overall returns to capital are driving the large money managers, such as pension fund administrators, to hustle to obtain something, anything, for their funds.  If they cannot produce returns, they face firing.SO you have this development of risk where it is not warranted, including risk in exposure to stock equities and corporate bonds, even junk bonds  (think of Michael Milken) to seek those returns.  And that is what is driving the markets to ever higher levels.  Is it sustainable?  Probably not.  Can anyone call a Top?  Probably not.  Will the trend to ever higher valuations continue?  Probably, at least as long as funds managers need or feel the pressure to get Returns.  It is all about the Returns.  

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''squirrelly'' is never good haha

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The stock market is where investors buy and sell shares in public companies. Learn more about how the market works and how to invest in it. Front running is considered a form of market manipulation in many markets. Some times a situation occurs that you need a financial advice who will guide you for the best. 

 

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