American Consequences - August 2017


Fear is the dominant emotion in the market at all times. It’s fear of losing more at the bottom and fear of missing out at the top. Besides the hit-me-in-the-face moment I think any experienced investor would feel when watching Scott Galloway’s presentation, there are quantitative measures that tell me to be careful right now too. THE SECOND-WORST TIME IN HISTORY TO BUY U.S. STOCKS The dot-com bubble was the most overpriced moment in U.S. stock market history, as measured by Harvard business professor Robert Shiller’s cyclically adjusted 10-year average price-to-earnings (P/E) ratios. The dot-com bubble peaked at a Shiller P/E ratio of 44. The 1929 crash was preceded by the second-highest Shiller P/E of 30. That’s about where the Shiller P/E is today... it surpassed 30 this summer. According to daily closing price data compiled by Bloomberg back to 1990, the dot-com bubble was also the most overpriced moment by price-to-sales ratio (2.35 times sales). By this measure, today is the second most expensive moment in U.S. stock market history. Investors who buy stocks at hyper-expensive moments tend to do poorly for years afterward. March 23, 2000 was the only other time besides right now that the S&P 500 rose above two times sales. From the day’s close (1,527.35), the index fell 49% to 776.76 on

October 9, 2002. The S&P 500 didn’t get back to its 2000 peak price level until mid- 2007. The S&P 500 didn’t eclipse its October 2007 peak until the first quarter of 2013. The moral of the story is this: Buying when the S&P 500 trades above two times sales can be very bad for your financial health. If history is any guide, we are now entering one of the worst times to buy U.S. stocks. Again, that’s not because this is the top. We have no idea when or if the top will arrive. But I’m certain that U.S. stocks are now priced for very poor returns over the next few years, maybe longer . I’m not telling you to sell everything and head for the hills. I’m not telling you to sell stocks short and forget about them for two years. For all we know, the big stock indexes could still shoot up in a speculative frenzy. That generally happens when investors get really manic. My colleague and fellow American Consequences contributor Steve Sjuggerud calls it a “Melt Up.” I’m only recognizing that current data indicate U.S. stocks are very expensive and come with plenty of risk right now. “Prepare, don’t predict,” and you’ll be much better off . Calling market tops and bottoms in the big indexes is totally unnecessary and you’re highly likely to be wrong. All you need to do is recognize that U.S. stocks are priced for lousy returns for several years to come.

54 | August 2017

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