7/7/2015 – A positive day with the Dow Jones up 95 points (+0.54%) and the Nasdaq up 5 points (+0.11%).
The S&P would have to drop 80% to re-recreate an environment when interest rates were this low last time.
Most bulls (most investors today) will argue that today’s high valuations are very well justified. Due to low interest rates. For instance….
Stocks aren’t expensive: Fidelity
In fact, because interest rates are so close to zero, some people believe that stocks deserve infinite valuations. This premise is also know as, “this time is different”.
This chart brings that assumption into question.
Simply put, just because interest rates are low, doesn’t mean P/E multiple cannot go down. For instance, in 1941 interest rates were at around 2% (exactly where they are today) while the P/E ratio rested at 8.
If such an environment was to repeat itself today, the S&P would have to take a 66% haircut.
But wait, it gets even worse. In 1941 we were at the bottom of that particular economic cycle. The earnings have already contracted and stocks were selling at a massive discount. In fact, they were about to stage a 5 year WW2 rally.
Today, the situation is reversed. Earnings expansion is at its peak (thanks to the FED and their little QE liquidity party) and the P/E ratio has only been higher on two other occasions (1929 and 2000). In other words, for the S&P to reach 1941 levels it would have to fall 80%.
Let me put it this way. Anyone who believes that this stock market rally will continue hasn’t studied history nor appropriate market valuation metrics. Plus and just FYI, “this time is different” is a terrible investment strategy.
This conclusion is further supported by my mathematical and timing work. It clearly shows a severe bear market between 2015-2017. In fact, when it starts it will very quickly retrace most of the gains accrued over the last few years. If you would be interested in learning when the bear market of 2015-2017 will start (to the day) and its internal composition, please CLICK HERE.
(***Please Note: A bear market might have started already, I am simply not disclosing this information. Due to my obligations to my Subscribers I am unable to provide you with more exact forecasts. In fact, I am being “Wishy Washy” at best with my FREE daily updates here. If you would be interested in exact forecasts, dates, times and precise daily coverage, please Click Here). Daily Stock Market Update. July 7th, 2015 InvestWithAlex.com
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