Tuesday, September 30, 2014

When Will Gravity Return To U.S. Stock Prices?

We discussed this topic a few weeks ago, but the following chart helps illustrate this concept perfectly. The entire U.S. market was more expensive back at the peak of the mania in 2000 because a small group of outrageously priced technology stocks moved the average weighting of the market higher. An analogy would be the average net worth of a bar filled with 10 patrons increasing substantially if Warren Buffet were to walk in. 

Today's market has a few sectors that are priced higher than others, but the market as a whole is more expensive (and dangerous) than it was in 2000. You can see this by looking at the median (middle number) price to sales ratios instead of using the mean (average). The market is now well above any point in history including 1929, 2007 and even 2000. 


Beginning in the late 1980's, due to the insane monetary policies of then Federal Reserve chairman Alan Greenspan (which have not stopped since), the U.S. economy has experienced overheated asset bubbles which have temporarily boosted corporate profits and the S&P 500. What followed the first two artificial booms were collapsing S&P 500 prices and collapsing corporate profits. Stocks and profits have continued to find a way to mean revert back to the actual growth of the real economy. It is only a matter of time until the current asset price inflation will subside, taking corporate profits and the S&P 500 back down to reality once again. 


While technology stocks and real estate fueled the first two asset bubbles, this time it has been turbocharged by the entire bond market. Record low junk bond yields (anyone can borrow as much as they'd like at lowest cost in history), have fueled short term gains. A large portion of this junk bond issuance has been used by companies to purchase their own stock and turbocharge prices in the short term. It should not take a high level of finance education to understand this type of artificial ponzi growth will not end well. 


h/t StreetTalkLive


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