How Far Can The Stock Market Run?

Very little to the upside.  Very much to the downside.

Macro Valuation Metrics

Lots of incoming over our S&P Shooting Star post, most of which can be summed to the effect, “Why so bearish?”

Seriously?   Our predisposition to the market is always anchored in time tested valuation metrics, which are hard to manipulate.  That is why we like market capitalization deflated by some macro variables, such as nominal GDP or wages.

Micro measures, such as Price-to-Earnings are too distorted by buybacks and easily manipulated by CFOs, who can play around with variables such as depreciation or loss reserves.

Our two favorite are  1) market cap-to-GDP,  which, according to Warren Buffet is,  “the best single measure of where valuations stand at any given moment.”   Take a look at the following chart and you will understand why the Oracle of Omaha is sitting on a record $122 billion stockpile of cash,  2) the number of hours of work needed to buy the S&P500, not a perfect valuation measure but does track our other favorite quite well.  The average person, making the average salary is not a big holder of stocks but the metric does give a heads up when the stock market becomes divorced from the underlying economic trend.

Take a look at the data and you decide, folks.   Keep in mind, the charts are ratios, not price indices, and can’t continue to rise forever.

Turn off the talking heads on bubble vision and #FinTwit, who will find it difficult to interpret the following charts because their salaries and year-end bonuses depend on their not understanding them or to outright dismiss them.

 Source:  Advisor Perspectives

Run Forest Run

Can markets, once again, convince themselves that historic valuations no longer matter?  Possibly,  but they will need a theme to fuel the delusion.

It could come in the form QE Forever, which we don’t think is very probable.  That jig is almost up and any further rise in inflation will put a stake through its heart.

Artificial Intelligence?   This is the one to watch, which will be a major disruptive force for decades to come.

The theme goes something like this.  Companies can lay off all their workers and replace them with machines and algorithms, which will inflate margins to infinity and beyond.

The problem with this scenario is it would crush aggregate demand and economic growth.  The geniuses are trying to find a balance and, thus far, have come up with concepts such as Universal Basic Income (UBI) and Modern Monetary Theory (MMT).

Stay tuned.

Wake us up after the above charts regress to their means, about 40 percent lower.