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Warning Signs

Posted on April 20, 2016

Warning Signs

Posted on April 20, 2016

 

What do some of the most metrics tell us about our marketplace today?

I’m concerned with some of these metrics and turns out, I’m not the only one out there bringing these factual stats to light.  Heck, upon wanting to grab some of these charts I came across articles by others who were writing about similar metrics.  They, as well as me, see the warning signals these charts and stats are sending, in unison.  Yet most striking, amidst these stats is the fact that both  Yellen’s and LaGarde’s rhetoric of a glim outlook of growth on a global scale recently didn’t make the market blink—rather it still has been bid-up ever since. 
Wait. What?
Below, I’ve posted many current charts and measures that fundamentalists follow and use to gauge the health of the current economy.  With each of these charts I’ll break down in a sentence or two what they mean.
If you don’t care to look I’ll break it down simply here with words.

  1. Current Schiller PE Ratio is heavily overbought meaning prices are too high.  Historically, its ratio is at the level where it’s reversed to the downside.

    1. Currently 26.33 which is 36.6% above the mean.

  2. Current S&P PE Ratio is the one you’ll see reported.  Schiller’s PE Ratio above is adjusted for inflation from the past 10 years thus resulting in a stricter and more accurate measure than the S&P 500 PE Ratio. Either way, they’re both over-valued.

    1. Currently 24.29 which is 35.8% above the mean.

  3. Current Dividend Yield is too low. Low Dividend Yields typically mean high current share prices. When share prices are too high it means trouble.

    1. Mean = 4.39%

    2. Current = 2.09%

    3. Difference = -52.4% decline in yields.

  4. Tobin’s Q is high as well. It was hypothesized by James Tobin that the combined market value of all the companies on the stock market should be about equal to their replacement costs.  A Tobin’s Q of 0 to 1 means the stock is undervalued. A value greater than 1 means the stock or stocks are overvalued. It’s currently 1.02 which is near other historical peaks on this chart, thus portending to an overvalued stock market.

  5. US Consumer Sentiment is steadily declining since its peak in 2015. Interestingly, it wasn’t strong from 2004 to 2007 either—showing how weak it was prior to the Financial Crisis.  It got stronger after the Financial Crisis but looks toppy on the chart presented on this article.

  6. Look at the charts below and come up with your own conclusions.

Conclusion:
Even though I built a case against a bullish outlook my job isn’t to predict its ups or downs.  When the market chooses to pull the rug out from under us, like it inevitably does, I think Milton’s plan is brilliant. Haha.
 
 
 
Data courtesy of Robert Shiller from his book, Irrational Exuberancehttp://ir-na.amazon-adsystem.com/e/ir?t=multpl-20&l=as2&o=1&a=0767923634 .1
1 http://www.multpl.com/shiller-pe/
 


Source: Robert Shiller and his book Irrational Exuberancehttp://ir-na.amazon-adsystem.com/e/ir?t=multpl-20&l=as2&o=1&a=0767923634 for historic S&P 500 PE Ratio.2
2 http://www.multpl.com/
 
 


 
Sources:
Standard & Poor’s for current S&P 500 Dividend Yield.
Robert Shiller and his book Irrational Exuberancehttp://ir-na.amazon-adsystem.com/e/ir?t=multpl-20&l=as2&o=1&a=0767923634 for historic S&P 500 Dividend Yields.3
3 http://www.multpl.com/s-p-500-dividend-yield/
 
 


Source: http://www.advisorperspectives.com/dshort/charts/index.html?valuation/Q-Ratio.gif
 
 
 


 
Sources:
Standard & Poor’s
Robert Shiller and his book Irrational Exuberancehttp://ir-na.amazon-adsystem.com/e/ir?t=multpl-20&l=as2&o=1&a=0767923634 for historic S&P 500 prices, and historic CPIs.5
 
5 http://www.multpl.com/s-p-500-historical-prices
 

 

Current Real Price: 2,094.34 +13.61 (0.65%)
4:07 pm EDT, Mon Apr 18

Mean:

457.23

 

Median:

237.47

 

Min:

64.15

(Jun 1877)

Max:

2,105.78

(May 2015)

Inflation adjusted, constant February 2016 dollars.
Sources:
Standard & Poor’s
Robert Shiller and his book Irrational Exuberancehttp://ir-na.amazon-adsystem.com/e/ir?t=multpl-20&l=as2&o=1&a=0767923634 for historic S&P 500 prices, and historic CPIs.6
 
6http://www.multpl.com/inflation-adjusted-s-p-500