Is the United States stock market on the verge of a massive correction? Perhaps it will happen sometime during this administration, or maybe it will happen at the start of the next administration. The timing of shares plummeting can never be accurately predicted. But the collapse in stock market values will occur.
Last week, it was reported that a strong majority of fund managers concurred that stocks are the most overvalued they have been since the dot-com era. Eighty-one percent of fund managers noted that not only are stocks overvalued but they also believe a March or April risk rally pause may unfold.
You have companies receiving multi-billion-dollar initial public offerings (IPOs), even though they have yet to turn over a penny in profits. When the results of the study were released, American stocks suffered their worst day in 2017 – is this a sign that the bull market is set to transform into a bear one?
Like the dot-com bubble and the days leading up to the economic collapse, there are financial experts today who still purport that this bull run will last for years, and if a correction will happen then it will only be a couple of percentage points.
Why? Because this one is different, dammit!
Don’t think the stock market is overvalued? Here are 13 signs to show that the U.S. stock market is overvalued:
1. The total market capitalization of the Wilshire 5000 index as a percentage of the U.S. gross domestic product (GDP) is more than 120 percent, which is much higher than the 45-year average of 75 percent.
2. The spread in the benchmark between Treasury bond yields and junk bond yields has cratered to roughly 400 basis points, down from 800 basis points in 2016.
3. It was noted last month that the yield on C+++ corporate bonds has dipped to 10 percent.
4. U.S. businesses have substantially increased their debt loads from about 175 percent 15 years ago to 240 percent today.
5. The market is overvalued by eight percent, according to the price to forward earnings ratio.
6. Looking at the cyclically adjusted price to earnings ratio, or CAPE, which utilizes the 10-year inflation adjusted earnings, will show that the market is overvalued by 52 percent.
7. Ostensibly, the ratio of annual forward dividend to price, otherwise known as the dividend yield, suggests that the market is overvalued by 48 percent.
8. A majority of IPOs since 2015 have been unprofitable.
9. Results from last week’s Investors Intelligence (II) sentiment survey found that the number of bulls decreased to 53.4 percent, the lowest level since the U.S. presidential election. The same survey also found that nearly one-third are expecting a correction.
10. The same II sentiment survey discovered that the number of bears surged to 17.5 percent.
11. Last week, the 12-month price-earnings ratio has jumped to above 21, the highest since 2005.
12. Margin debt – the amount of money lent out for investment – is hovering around at an all-time high.
13. The activity level for mergers and acquisitions (M&A) has hit $2.2 trillion. When was the last time it was this high? The year 2007, when it was worth $2 trillion. Also, 2016 was the first annual rise since 2007.
Is it time for another “irrational exuberance” speech from former Federal Reserve Chair Alan Greenspan?
The Dow Jones has topped 20,000 points, the NASDAQ and S&P 500 are surging, and everyone expects the bull run to last forever. These are great times, where the champagne flows from the heavens and everyone gets kissed.
The only difference with this overvalued stock market compared to previous ones is the number of first-time investors. Unlike other bull runs, either in the U.S. or abroad, young, novice investors are still apprehensive about parking their money in the stock market.
Aside from that, this is the typical Fed-induced bubble stock market: unprofitable companies with billion-dollar valuations, indexes making record highs and analysts that believe bulls can run an eternal stampede.
With the money supply moderating, interest rates beginning to rise and stocks at all-time highs, a correction is imminent. It is time to be ready for such a scenario.
–AM
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