It is no secret that the stock market is historically overpriced. So much so that I have argued we are experiencing the highest valuation levels in history. Higher than 1929, 2007 and even 2000 (if we adjust for lack of tech earnings). Prior smaller peaks of 1937, 1966, 1972, 1987, etc…. don’t even come close.
This is best illustrated by the Shiller’s Adjusted P/E Ratio below. 
So, what gives?
First, the sentiment….. Retail investors haven’t been THIS bullish since (gulp) you know when
Since February 2016, the overall index has soared 98 points, “the largest increase in the 20-year history of the index that is not a rebound immediately after a major drop in optimism.” This is the kind of move contrarians eat up.
“In 1999 and early 2000, high enthusiasm for stocks was a powerful sign the stock-market bubble was on its last legs,” Richter said. “Of course, no one can say how much higher their enthusiasm will surge this time around. Hype works, until it doesn’t.”
Buy High Sell Low…….Right?
Second, the driving force….Central Banks Have Purchased $2 Trillion In Assets In 2017
In his latest “flow report”, BofA’s Michael Hartnett looks at the “Disconnect Myth” between rising stocks and bonds and summarizes succinctly that there is “no disconnect between stocks & bonds.”
Why? The best, and simplest, explanation for low yields & high stocks is simple: so far in 2017 there has been $1.96 trillion of central bank purchases of financial assets in 2017 alone, as central bank balance sheets have grown by $11.26 trillion since Lehman to $15.6 trillion. Hartnett concedes that the second best explanation is bonds pricing in low CPI (increasingly a new structurally low level of inflation due to tech disruption of labor force) while equities price in high EPS (with little on horizon to meaningfully reverse trend), although there is no reason why the second can’t flow from the first.
And there you have it ladies and gentlemen.
- The market is incredibly expensive. Record breaking expensive. Even if we take low yields into consideration.
- Idiot central bankers are terrified of what happens next. Instead of letting the bubbles deflate they have juiced them to unimaginable levels. And in nearly all assets classes.
- So much so that most retail investors now believe stocks will never go down. And even if they do it will be a BTFD situation.
We all have been here before and we all know what happens next. It is different this time as so many believe? Perhaps, but if you truly believe that I still have some Pets.com stock to sell you.
If you would like to find out exactly what happens next based on our Timing and Mathematical work, please Click Here.