***At its peak in March of 2000, the total value of the US stock market approached 171 percent of US GDP. Currently it stands at 129 percent of GDP. When the bull market began in 1982 it stood at 36 percent of GDP when dividend yields were at 7 percent, and PE multiples on the major indices were around 7. Even with today’s trumped up numbers, the major indices are grossly overvalued. To get back to normal valuations could mean the Dow would have to drop another 71 percent from where it presently stands. The Dow still trades at a PE multiple of 30 with a dividend yield of only 1.75 percent. The S&P 500 is selling at 63 times earnings with a dividend yield of 1.36 percent. In the case of the Nasdaq, there are no earnings since the majority of the companies within the index are losing money. The stock market is still grossly overvalued by any yardstick or standard of valuation. Authorities are still trying to hold up the markets by giving investors something to believe in. The spin is getting so thick that the markets are covered with a layer of fog that shows no sign of lifting. It has become a game of confidence the authorities are going to lose in the end. John Q. Public may not completely understand it, but he knows his neighbor just got layed-off, his monthly bills are going up, his credit card debt is rising in order to pay the bills, and his stock portfolio is still hemorrhaging from losses.
During the last bear market of the 60’s and 70’s, authorities fought and tried to prop up the markets with every tool at their disposal from fiscal spending to printing money. All that was accomplished was the inevitable was postponed for a number of years before a Middle East War, an energy shock, and a political scandal brought the financial markets down. We have the potential of the first two events becoming a reality in the Middle East and in the energy markets.
The markets are more than likely to trade within a narrow trading range with, as Russell says, mini bear and bull markets in between. As James Paulsen has pointed out from Wells Capital Management, it has now been 485 days since the Dow reached its peak on January 14th of 2000.***
financialsense.com |
