The frantic tech-led bull rush in Wednesday and Thursday’s trading sessions should once again remind retail investors of the shaky fundamentals supporting indexes’ surge to new record highs.
We are looking at “an extremely overvalued stock market, driven by a speculative euphoria even while the price trend is running out of steam,” Jesse Felder of the Felder Report warned in a blog post Wednesday.
Theoretically speaking, unless investors started shifting more cash away from high-flying momentum names and into safe havens, the basis of Felder’s outlook, which is based on fundamentals, sentiment and technical factors, is correct.
In fact, the stock market, particularly when faced with an economic Black Swan the likes of which have never been seen before, seems to have entered a new cycle. And it’s neither growth nor optimism. This market is sitting firmly in a “despair” phase.
Felder says the Buffett Indicator — the historic ratio of total market cap to GDP — is strongly overvalued and sitting near its highest reading in history. Speaking of record readings, the S&P 500’s price/earnings (P/E) ratio currently exceeds its pre-1995 levels, while the Shiller P/E ratio is above 32. For those interested, the average Shiller P/E over the past 150 years is in the mid-16 levels. But getting back to Buffett’s valuation measure, also known as the Buffett Yardstick, the reason the measure is so valuable is because it’s very good at offering a long-term perspective when it comes to equities.
“In other words, the stock market has never been as expensive as it is today, largely the product of soaring valuations amid deteriorating fundamentals,” Felder wrote, noting that “[n]ot only does this mean that forward returns will likely be exceptionally poor, it means that downside risk has also never been greater than it is today.”
As if that negative but objective assessment wasn’t enough, Felder believes speculation, strengthened by Fed stimulus and low-interest rates, has reached unprecedented levels.
“Just as we are witnessing unprecedented valuations, those extreme prices have been driven by extreme greed, the likes of which we haven’t seen in generations, if ever before,” Felder explained.
Commenting on technicals, specifically, the RSI oscillator, Felder said that based on the measure’s reading, “the strength of the current uptrend peaked nearly 3 years ago and has only been weakening since, putting in a clear pattern of lower highs.”
What Felder is implying here is that we are clearly in a “late cycle”, which is an economic phase that’s marked by decelerating economic growth and peaks in profit margins, sales and P/E ratios and that investors should be exercising “a great deal of caution towards equities as an asset class.”
Markets Price Action
As of writing, S&P 500 traded 0.17% lower at 3,504.47. Dow Jones is nearly 90 points lower at 28,301.09. Nasdaq, up 32% year-to-date versus Russell 2000 being virtually flat, lost 0.13% at 11,878.72.