The market has been defying gravity since the March, 2009 low and many Wall Street pundits forecast a continuation of the melt up at least until the end of this year. But is this prognostication justified?
Could it be that the continued rise in equities is due to the fact that the Fed has kept interest rates artificially low? Many say that this is the likely case and I have to agree with them. But will this continue to be the case? Maybe for the near future but what happens if inflation keeps rising, as it has started to do? There’s no doubt, at least in my mind, that we could be in for a painful market correction. The reason I draw this conclusion is based in part on the market internals, many of which are near, at, or have exceeded historic levels.
Let’s consider some key internals gathered by multpl.com over the past 150 years for the large-cap S&P 500 index:
Price/Earnings (P/E)
Current: 33.99 (Third highest in history)
Historic Mean: 15.95
% Above/Below the mean: +213%
Historic Median: 14.86
% Above/Below the mean: +229%
Price/BookValue
Current: 4.64 (Second highest in history)
Historic Mean: 2.89
% Above/Below the mean: +160%
Historic Median: 2.78
% Above/Below the mean: +167%
Price/Sales
Current: 3.13 (Highest in history)
Historic Mean: 1.62
% Above/Below the mean: +193%
Historic Median: 1.52
% Above/Below the mean: +206%
Earnings Yield
Current: 2.94% (Third lowest in history)
Historic Mean: 7.30%
% Above/Below the mean: -60%
Historic Median: 6.73%
% Above/Below the mean: -56%
Dividend Yield
Current: 1.33% (A virtual tie with the 2000 historic low)
Historic Mean: 4.30%
% Above/Below the mean: -69%
Historic Median: 4.26%
% Above/Below the mean: -69%
The above statics indeed show that the market is on very shaky grounds. There is no question that we are well overdue for a reversion to the mean but when exactly that will occur is up to the Fed regarding monetary policy and up to Congress regarding raising the debt ceiling and continuing their drunken spending spree.
Methinks this won’t end well.