Markets Priced For Perfection Rarely Get What They 'Price In'

Feb. 15, 2017 2:22 PM ETSPDR S&P 500 Trust ETF (SPY), QQQ, IVV, IWM, JNK, ACWI53 Comments
Gary Gordon profile picture
Gary Gordon
30.91K Followers

Summary

  • Fundamentally speaking, stocks have rarely been as overvalued as they are here in February of 2017.
  • Forward P/Es for the S&P 500 and the Russell 2000 are already competing with 2000's tech bubble.
  • Other metrics, including market-cap to GDP (a.k.a. "Warren Buffett Indicator") are flashing black, blue and purple.
  • And Shiller's P/E? Other than 2000, you'd have to go back to 1929's infamous crash to uncover cyclical price-to-earnings ratios (PE10) that screamed louder.
  • High yield bonds are also problematic. The excess yield that a high yield investor is demanding above comparable risk free treasuries is only 3.85%, where the forward return of high yield bonds might be no better than that of treasury bonds with similar durations.

It is almost inconceivable. Just 10 years ago, you could purchase a 3-year Treasury and sock away a risk free rate of return of nearly 6%. Right now? A paltry 1.5%.

It follows that, today, one must take enormous chances to generate an income stream up and above the pace of inflation. And that's only if you believe inflation gauges placing the annual rate in the neighborhood of 2%.

For example, let's assume an individual purchases a 5-year Treasury for its risk free 2% yield. The year-over-year income might maintain the individual's purchasing power if the person's basket does not involve things like medication, healthcare, education, child care or rent. Worse yet, if the individual's portfolio is much like the 5-year Treasury itself, the portfolio's real rate of return would be 0%.

What if the investor wants a real return far greater than 0%? Well, then, he/she would need to take significant chances with money in riskier assets. Stocks, high yield bonds, REITs, MLPs. Indeed, the pursuit of modest reward would come with a high probability of considerable financial loss.

Fundamentally speaking, stocks have rarely been as overvalued as they are here in February of 2017. Forward P/Es for the S&P 500 and the Russell 2000 are already competing with 2000's tech bubble.sp-500-valuation

valuation-russell-2000

Other metrics, including market-cap to GDP (a.k.a. "Warren Buffett Indicator") are flashing black, blue and purple. And Shiller's P/E? Other than 2000, you'd have to go back to 1929's infamous crash to uncover cyclical price-to-earnings ratios (PE10) that screamed louder.

wilshire-versus-gdp

shiller-pe

So you do not believe in traditional fundamentals? Fair enough. Of course, even amateur technical analysts are taking notice of the fact that the MSCI All World Index via iShares MSCI ACWI ETF (NASDAQ:ACWI) is more overbought than at any moment since July of 2014. Back then, after

This article was written by

Gary Gordon profile picture
30.91K Followers
Gary A. Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. He has 30 years of experience as a personal coach in “money matters,” including risk assessment, small business development and portfolio management. He favors tactical asset allocation strategies over "set-it-and-forget-it" investing.Gary is often asked to consult as an educator. He has taught financial concepts in Mexico, Singapore, Hong Kong, Taiwan and the United States.As a Certified Financial Planner (CFP), Gary has distinguished himself as a reputable and trusted investor advocate. Gary’s participation on local and national radio has spanned more than two decades. He writes commentary at his web log, TheStockBubble.com.

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