The best two metrics to demonstrate how expensive stocks are today are the S&P 500 price-to-sales (P/S) ratio and the ratio of total U.S. market cap to U.S. gross domestic product (“GDP”). Over the past century or so, whenever the P/S ratio has been high, the market has tended to perform poorly, sometimes for many years. At the peak of the dot-com bubble in March 2000, it was 2.3. Today, it’s 2.9 . The total market-cap-to-GDP ratio was pioneered by value guru Benjamin Graham and often cited by his prized pupil, Warren Buffett. It, too, has never been as high as it is today. It peaked at 140% in 2000 and 105% in 2007. Now it’s 195% . We also follow the stock market valuation work of economist/asset manager John Hussman of HussmanFunds.com. He tracks five metrics, including P/S, that have all correlated negatively over the past century with subsequent 10- and 12-year S&P 500 performance. Roughly 90% of the time when they’ve been high, the S&P 500 has performed poorly for a decade. Never forget, investing is a journey, not a destination... Stocks are more overvalued than at any time in the past century. Use caution, and make sure you’re holding a truly diversified portfolio.
In a recent market comment, Hussman writes... Presently, I expect that the completion of this market cycle is likely to involve a loss in the S&P 500 on the order of 65-70%. I realize, of course, that this sounds insane. The problem is that this projection is fully in line with a century of evidence and is consistent with the extent of market losses that would be run-of-the-mill given present valuation extremes. Hussman estimates that a portfolio of 60% S&P 500 stocks, 30% long-term Treasury bonds, and 10% Treasury bills will lose 1.7% per year for the next 12 years. He estimates the S&P 500 by itself will lose 3.6% per year for the next 12 years. Asset manager Jeremy Grantham’s firm, GMO, has studied a couple dozen asset bubbles throughout history. It also publishes seven-year return forecasts for various asset classes. Grantham recently called the current market a “real McCoy’ bubble” and added, “It’s truly crazy.” GMO’s seven-year annual return estimates for all U.S. equities and bonds, international large-cap equities, and international bonds are negative . Its only attractive forecast is for value stocks in emerging markets, at 9.1% per year. Never forget, investing is a journey, not a destination... Stocks are more overvalued than at any time in the past century. Use caution, and make sure you’re holding a truly diversified portfolio.
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February 2021
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