The bubble and the reckoning

Benjamin A Smith writes: This is the “everything bubble,” where a broad-based collection of stocks are just plain expensive. In most cases, not eye-poppingly expensive like we saw in internet stocks two decades ago. However, it’s expensive enough that collectively, the market is the second priciest on record.

A widely-followed indicator confirms as such. The “CAPE” ratio is an acronym for “Cyclically Adjusted P/E” ratio. It compares a stock’s price performance relative to earnings over a 10-year period. It’s highly regarded because it smooths out earnings volatility and adjusts for inflation. Right now, it’s screaming “sell.”

In the history of the stock market, the CAPE ratio has only been more expensive between June 1997 to September 2001. It’s topped over 30 now, breaking even the gaga days of the 1920’s mania. Along with it, the “Panic-Euphoria Model,” which is the S&P 500 forward P/E-to-volatility ratio, is also at its second highest point in history, showing how euphoric investors are really feeling. By almost any measure, the market is historically expensive. (Source: “Probably Nothing,” Zero Hedge, June 18, 2017.)

Yet, investors seem to be sleepwalking their way into unreality. Record inflows into U.S. equities keep occurring, allowing this magic levitation ride to push forward. Sell-inducing volatility surges only last a session or two, then die off. U.S. stock have climbed the biggest wall of worry in history, and show no signs of quitting. Equity overvaluation, the threat of trade wars, tepid growth, record public debt…the list goes on. Read full article here