As the post-Trump election euphoria in U.S. equities reaches a fevered pitch, at least one prominent analyst is skeptical of the seemingly irrational rally.
Venerable market voice Mark Hulbert, who founded the Hulbert Financial Digest, writes today that no matter what metric you want to use, stock valuations are historically high:
Depending on which of six widely used valuation measures, the market currently is more overvalued than it was, at between 79% and 95% of the three dozen bull-market tops since 1900. (According to a bull-market calendar maintained by Ned Davis Research for a precise list of those market tops.)
Hulbert points to the price/book ratio, price/sales ratio, dividend yield, cyclically adjusted price/earnings ratio, “q” ratio, and P/E ratio of the S&P 500, all of which are significantly higher than the vast majority of the eras where we saw a major pullback. When things get this overheated, according to past market patterns, it’s often been a smart move to avoid the buying frenzy.
While some would say the reaction to Trump’s election is a major vote of confidence, it’s difficult to shake the eternal truth that big upside moves for stocks are essentially “borrowing” those gains from the future. The more stocks move up above historical norms, the more their future performance tends to suffer.
Then there’s the idea that stocks are simply continuing to benefit from low interest rates. While that idea certainly seemed to hold water over the past several years, interest rates have been surging recently. Also, there’s no easily identifiable research to point to that sort of correlation — so low rates don’t necessarily mean anything for stock performance in and of themselves.
Bulls will likely counter that bearish arguments since the financial recovery began way back in 2009 have always proven false. Hulbert simply closes his argument with the following:
To be sure, the stock market has been overvalued for several years now, and so far a bear market has been averted. But that doesn’t mean it can be postponed forever.
The SPDR Dow Jones Industrial Average ETF (NYSE:DIA) rose $0.45 (+0.24%) to $189.79 per share in morning trading Tuesday. Year-to-date, the only ETF tied to the Dow has gained 9.07%.