The Equity Bubble Persists

In what was a very slight retreat, the S&P500 lost about 0.4% last week on light volume. Volatility remained relatively unchanged and hovering near the lows of the year.

Breadth continue to erode. The McClellan Oscillator lost ground, and the percent of stocks above their respective 50 and 150 day moving averages also dropped. Yes, prices are still near all-time highs and yes the 200 day moving average is still sloping upward (with closing prices comfortably above this moving average), but the divergences are growing and for the year, the S&P500 has done very little…..closing last week not much higher than it was at the start of the year.

In economic news, the week was a downright disaster, with almost all major news releases missing consensus forecasts. PMI Services kicked off the week with a miss. The Dallas Fed manufacturing survey notched its worst monthly losing streak ever. Consumer confidence plunged—-recording its biggest miss in five years! The Richmond Fed manufacturing survey missed. GDP missed by a mile. Personal income and personal spending missed; income was particularly bad. PMI manufacturing also missed. ISM manufacturing missed, as did consumer sentiment and construction spending. Only weekly jobless claims and Chicago PMI registered better results than expected.

While we’ve already mentioned that the bull market in US equities is still in effect (and that verdict will not change until prices cross below, and stay below the 200 day moving average to bend it so that it slopes downward), anyone who puts new money “to work” in the US stock market is betting that what is already a very easy to diagnose bubble will become an even larger bubble over the next 1-2 years.

Why is this bubble so easy to diagnose? Because 100 years of data virtually prove that when the stock market valuation relative to GDP and to corporate sales reaches the current levels (levels over 100% above 100 year old norms), that the valuation is not sustainable. And by not sustainable, we don’t mean that they might correct by 5%, 10% or an even more painful 20%, but that prices might correct by 50% or more. Why? Because, from these valuations, they always have. Without fail.

So to bet on stocks today means to bet that 100 years of history are wrong, or at least no longer relevant.  To bet on stocks today means to bet that the usual 50 plunge from such levels will not happen, and that for the first time ever, only a minor correction—to be bought of course!—is the only downside.

Unfortunately, most retail investors and even institutional investors who cannot afford the career cost of “missing out” on gains, even when they’re unsustainable bubble gains, will suffer the consequences when the tide finally turns.

Short-termism is not a disease; it’s a fact of life in investing. And unfortunately, it always comes back to haunt those—which is most everyone—who cannot avoid its grip.  Without fail.



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