Valuation Warning: The S&P 500 Is In A Bubble

John Hussman, President of Hussman Investment Trust (Hussman Funds), published very important charts in his Weekly Market Comment this week titled "Do the Lessons of History No Longer Apply?" One set of charts looked at market valuation ratios "as the percentage deviation from their historical norms prior to the late-1990’s equity bubble." He looked at 1) price/normalized forward operating earnings, 2) price/10-year earnings adjusted for profit margins, 3) price/10-year inflation-adjusted earnings (Shiller), 4) market capitalization of non-financial equities/nominal GDP, 5) Tobin's Q-ratio, and 6) price/revenue.

John Hussman continues to believe that the stock market is overvalued based on historical comparables, and he's right. At least I think he's right. Of course it's all about timing. I think the market environment is very dangerous right now because central banks keep propping up asset prices worldwide to try to prevent deflationary collapses. And the ECB hasn't even started QE yet!

On valuations, John Hussman said (emphasis mine):
While it’s easy to lose sight of the extremity of the present situation, these measures are well over 100% above their respective norms, on average. On the most reliable measures, we estimate that S&P 500 valuations are now only about 15-20% short of the 2000 extreme, and are clearly above every other extreme in history including 1901, 1929, 1937, 1972, 1987, and 2007. Again, these measures are also better correlated with actual subsequent market returns than popular alternatives such as price/forward operating earnings and the Fed Model (which adjusts the S&P 500 forward operating earnings yield by the level of 10-year Treasury yields).

Read his full Weekly Market Comment here.

Here are recent related posts on QE and central banks at my other blog News Moving Markets:

*Bank Of Japan Taking Bold Steps To Fight Deflation
*What The Bank Of Japan's Stimulus Shocker Means For The Global Economy
*Three Things That Are Keeping Stock Markets From Tanking
*BOJ Shocks Markets With Surprise Easing
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