There Are Only Two Other Times In History When Stocks Were More Expensive Than Today
The comments above & below is an edited and abridged synopsis of an article by Phoenix Capital
The average stock today is trading at 73% above its historical average valuation. There are only two other times in history that stocks were more expensive than they are today: just before the Great Depression hit and in the 1999 run-up to the dot-com bubble’s bursting.
We know what happened in both cases: Stocks declined—a lot. Based on over a century of history, we are fairly sure that this time too, stock valuations will revert to their mean and stock markets will decline. After all, price-to-earnings behaves like a pendulum that swings around the mean, and today that pendulum has swung far above the mean.
We don’t know how this journey will look in the interim. Before the inevitable decline, will price-to-earnings revisit the pre-Great Depression level of 95% above average, or will it say hello to the pre-dot-com crash level of 164% above average? Or will another round of QE from central banks send stocks valuations to never-before-seen highs?