Thursday, October 24, 2013

Hussman: The S&P is Overvalued Based on the Shiller P/E, Price/Revenue Ratio, and Market Value of Non-Financial Stocks/GDP (Charts)

John Hussman, President of the Hussman Investment Trust, mentioned this in his most recent Weekly Market Comment titled 'Did Monetary Policy Cause the Recovery?' (10/21/2013). Read it at HussmanFunds.com. I put up a 20 year chart of $SPY (the S&P 500 ETF) at the bottom of the post to show you how the stock market is reliving the 1990s. The S&P definitely looks severely overbought at the moment, and if the S&P can break through that uptrend line from 2009 on a correction, I bet it will be the beginning of the next cyclical bear market. Judgment day is near for the market.

Hussman on the S&P 500's Shiller P/E ratio:

As investors, we should be aware that the current Shiller P/E of 24.8 (S&P 500 divided by the 10-year average of inflation adjusted earnings) is now above every historical instance prior to the bubble period since the late-1990's, save for the final weeks approaching the 1929 peak. We should also be aware that overvaluation alone in the late-1990’s did not stop the market from reaching even higher levels as new-era speculation culminated in the 2000 bubble peak.

Hussman on the S&P 500's Price/Revenue ratio:

Examining various historically useful fundamentals, the S&P 500 price/revenue ratio of 1.6 is now twice its pre-bubble historical norm of about 0.8. For perspective, it’s worth noting that the 1987 peak occurred at a price/revenue ratio of less than 1.0 and neither the 1965 secular valuation peak, nor the 1972 peak (before stocks dropped in half) breached even 1.3. Also, take care to note that the price/revenue multiple is twice the historical median – not twice the level where bear markets have typically ended. No, the price/revenue ratio is closer to three times that level.


Hussman on the Market Value of Non-Financial Stocks/GDP ratio:

Broadening our view to a larger set of historically reliable measures that are actually well-correlated with subsequent market returns, we arrive at identical conclusions. For example, the market value of non-financial stocks to GDP (based on Z.1 flow-of-funds data from the Federal Reserve) presently works out to about 1.24. This is twice the pre-bubble norm, well above the 2007 peak, and already at late-1999 levels.

Read John Hussman's full note here.

In the 1990s, $SPY rose 298% from 30.6 to 121.8; and from 2009 to today, $SPY is up 191.4%. Both cyclical bull markets have the same exact uptrend line.


Source: StockCharts.com

One more thing, according to Elliott Wave International

[M]argin debt as a percentage of annual GDP is still 10 times the 1974 level. ... The current ratio is also 3 times what it was at previous major tops in the stock market in the 20th century.

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