The chart above is rather simple. Based on the long-term historical data, and not the opinion of “CNBC Pros”, given today’s valuation levels, don’t be surprised to see a net loss of 25-40% over the next 3 years. Rather, it is to be expected.
If the ratio is above the long-term average of around 16x, the stock market is considered expensive. Currently, this measure is just above 27x, a level we’ve seen only before stock market crashes in 1929, the dotcom bubble, and the global financial crisis of just a few years ago.
However, before I could praise this mainstream financial outlet for being honest and reasonable, it does a complete 180 and goes full retard.
But it’s a mistake to assume we’re doomed for an immediate crash.
But actually, the lesson there is that if you combine that with a good market diversification algorithm, the important thing is that you never get completely in or completely out of stocks. I think it looks like stocks should be a substantial part of a portfolio.
In other words, don’t dump stocks and hide in cash because the CAPE is at 27. Rather, buy less, be cautious, and expect lower returns for years to come.
And while I don’t anticipate a crash either, I think it’s criminal to encourage people to maintain their stock positions here. Particularly, at today’s valuation levels. You can’t have it both ways. We are either extremely overvalued and due for a correction, or we are not.
A view that the market will stay at today’s levels while earnings catch up is a delusional one at best. If you haven’t noticed, the US Economy is rolling over into an “official recession” and earnings are shifting into a negative growth territory.
So, I will tell you what they won’t. Not only should you “get the hell out of stocks…all stocks”, you should seriously consider a large allocation to a bear fund.
