Stock Market View

It doesn’t make sense but bull markets do not end due to overvaluation. They generally end with interest rates rising more than moderately, a decline in the money supply or a recession which we don’t yet have. But, we now have short and long term cycles that are issuing strong warnings. Take a look at the past and note the similarities with the market today. Dangerous market tops are usually accompanied by overvaluation. Caution is warranted. Yet, we still find so many stocks that are incredibly undervalued. For example, many gold and silver mining stocks are very cheap.

The stock market has avoided what would be normal corrections over the past three years. With several technical and fundamental indicators suggesting that a bear market to some degree should have occurred. What some technical analysts are surprised at and refuse to accept is the fact that the world’s central banks are supporting the stock market. Yes, they are “supportive” buyers when they feel that the stock market needs assistance.  The central bankers know all too well that the world cannot afford a bear market in U.S stocks. Last week we were informed that central banks now own over $24 trillion in “paper” in bonds and stocks.  Yes, that is $24,000,000,000,000 !!!!

*Recently officers and directors have been very heavy sellers (two weeks ago they sold over $495,000,000  in dollar value of their personally held companies’ shares-that is where they work or are directors)  That amount was one of the highest dollar value amounts in history. Little buying is being done comparatively speaking and when it is done, those officers and directors are buying their own companies’ shares when they find them undervalued; generally most have already suffered severe declines in price.

Too many gauges of value remain at extremely high valuation levels that in the past led to brutal bear markets. One indicator suggests the value of the stock market is at too high a valuation is the value of all publicly traded stocks to U.S Gross Domestic Product. Today stocks are at approximately 130% of GDP. It is not a timing indicator but from this level in the past, it has been followed by more than 30% market decline.

We are also at an S&P 500 price earnings ratio of twenty four, yes it has been higher in the past but it puts the market at approximately 30% above what would be the norm.

As well, Central banks buying shares has supported the market as well. However, it has created a situation where too many large cap shares were purchased at price levels that are selling far above reasonable valuations to keep the market up. Payback will come as it always does.

As always, profits should be taken and future entry “buying” points should be pre-set for buying during declines. One of the world’s most successful investors, the late John Templeton would often put orders to buy specific stocks in beforehand at prices that were well below their prices at the time. His belief was to buy during harsh declines. To Sir John, bear markets were an opportunity to invest at cheap levels. That opportunity should soon present itself again.