Six Ways US Stocks Most Overvalued in History
The comments above & below is an edited and abridged synopsis of an article by Mike Shedlock
Crescat Capital claims US large cap stocks are the most overvalued in history, higher than prior speculative mania market peaks in 1929 and 2000.
There are six ways stocks are the most overvalued in history: price to sales; price to book; enterprise value to sales; enterprise value to EBITDA; price to earnings; and enterprise value to free cash flow.
People dispute CAPE, concocting all sorts or reasons why it’s different this time, but the most common reason is interest rates are low. Stocks are cheap compared to bonds, which is like saying moon rocks are cheap compared to oranges.
Shedlock believes that it will matter in time. It could play out as a crash, or stocks could decline over a period of 6 to 10 years with nothing worse than a 15% decline in any given year, accompanied with several sucker rallies leading people to believe the bottom is in.
Some might say, if you don’t know when or how, of what use is such analysis. The answer is that history shows this is a poor time to invest in stocks. That does not mean that they cannot go higher.
History also suggests that people who invest in bubbles start believing in them. People believe in bubbles because they have to in order to rationalize their investments.
Others know full well it’s a bubble, but they think they can get out in time. Historically, few do, because most are conditioned to buy the dip, and keep doing so even after it no longer works.
Shedlock recently recommended an article, “Oppenheimer Predicts PE Expansion, Most Bullish S&P Forecast Yet.” So if you are looking for a reason to stay heavily invested in this market, you have one. But don’t fool yourself; this is the most expensive market in history.