What does Price-to-Sales tell us about the S&P 500?

Another week, and another super tiny close higher on the S&P500. It’s as if the US stock market, pretty much no matter what bad news hits, will tend to grind higher….even if only by a small percent. Last week, this gain was 0.26%. Volume was very light, and volatility was also low and dropping, as investors look to pad their incomes by continuing to sell volatility betting that it will simply never jump higher.

The technical picture has not changed much. If anything, it’s even more distorted—to the upside—than it was the prior week. Prices on both the daily and weekly charts continue to push up against, or even cross above, their respective upper Bollinger bands. To say that prices are overstretched, even on a short-term basis, is an understatement.

With respect to US economic data, the big report of the week was October payrolls, which missed by over 60,000 jobs. While the headline unemployment rate looked good (only 4.1%) that happened as a result of almost a million people leaving the labor force; as a result, they’re no longer counted as being unemployed, even though they have no jobs. In acknowledgement of this development, the labor force participation rate dropped from 63.1% to 62.7% which is a big drop in only one month. Also disturbing in the jobs report was the fact that average hourly earnings did not grow at all; they were projected to grow by 0.2%.

In other economic news, personal income only met expectations; but personal spending did beat slightly. Chicago PMI and consumer confidence also beat their respective consensus estimates. Construction spending and productivity also recorded beats. ISM manufacturing, on the other hand, disappointed, as did the Case-Shiller home price index when measured on a year-over-year basis.

Finally, veteran investment manager John Hussman—in his recent market commentary—carefully re-examined current US stock market valuation levels and one of his most interesting observations focused on the price-to-sales ratio . And specifically, he pointed to MEDIAN price-to-sales because without using the median, it’s very possible that a small group of very large and high-priced companies could make the entire S&P500 looked overvalued.

In fact, as Hussman notes, this is exactly what happened in the 2000 bubble when the overvaluation in the S&P was concentrated in the high-tech sector, when many other sectors were not very over-valued.

Today, the median price-to-sales ratio of the S&P components is about 50% above the 2000 extreme!  It’s also very well above the 2007 highs.

The conclusion he draws is two-fold. First, prices in the S&P500 are extremely overvalued, based not only long-term history, but even by comparison to the 2000 tech bubble. Second, in today’s bubble, there are no relatively safe sectors, like there were in the 2000 bubble where most of the extreme overvaluation was concentrated in the tech sector. Today, most every sector in the US stock market is extremely over-valued.

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