Value of the stock market of $22 trillion to U.S. Gross Domestic Product of $17 trillion.

Why have we not seen a bear market yet? Simply stated, key bear market components are not occurring-yet. We are not seeing our requisite ingredients for a bear market which are 1-Rising interest rates. 2-Contracting money supply growth (although the velocity of money is quite low) 3-No recession…not yet anyway depending on who or what you believe. So the key ingredients for a bear market are not in place……yet.

 

As well, near zero interest rates and an easy monetary policy has carried this market to its present levels. Oddly enough the stock market has avoided over the last three years what would have been normal 20% corrections. These 20% corrections have a record of what would occur using historic cycles.

 

The overriding upside supporting factor has been the Federal Reserve which does not want to see the economy suffer through a bear market. In our opinion, a bear market would devastate the economy and is a key to the Fed’s actions and view of the economy.  So the easy money will continue to flow into the market. While expecting a decline(s), we, at all times find exceptionally undervalued stocks in the Canadian and US stock markets. Bear markets always offer the greatest opportunities to accumulate stocks when they are exceptionally undervalued.

 

Our advice is to stay invested, as many stocks are very undervalued, but to take profits when specific stocks reach overvalued levels. Historically the professional investors and trading desks end up taking the lion’s share of profits before overvalued stocks return to proper valuation. The public watches events transpire in the markets and too often does nothing. I repeat that all the time, we are generally fully invested, there are always hundreds if not thousands of undervalued stocks in the US and Canada. We try to capitalize during corrections in stocks as they suffer through harsh price declines. But again, as in baseball, we want to know what inning we are in.

 

Today’s key point! The value of the United States stock market to US Gross Domestic Product is a very informative value indicator. The stage has been set if anything should go wrong. What stage? Recently, the value of US traded stocks which include the S&P 500 plus the NASDAQ carries a total value of $25 trillion!!!!!!! The numbers are $25,000,000,000,000.

 

 My estimate suggests that there is some duplication here and it also includes non-United States companies so a more accurate value might be closer to $22 trillion. Next, we compare it to United States Gross Domestic Product which will come in for 2014 at approximately $17 trillion. We divide the value of stocks by the US GDP which will give us the percentage of stocks to GDP…..Today that is 129% of GDP. It is a very high level historically speaking. In the late 1920’s, “Stocks to GDP” was as high as 109% and in 2001 it hit 187%…..However, if we do not include the Nasdaq value in 2000-2001 which was an incredible and illogical $6.7 trillion and focus on the Standard and Poor’s 500, the “Stocks to GDP” high of 2001 matches very closely to the overall value the market carrying today. Suffice it to say that we are at a level that as a timing gauge is imperfect but as a prelude indicator has effectively advised “watch out” when we saw the two times in the past when it did occur,  Brutal downsides for the stock market followed.

 

In 2000, I was writing two technical columns, one in the US and another Germany and warned investors to be prudent, a bear market was coming focusing on the “Stocks to GDP” model and “get out of the tech stocks and many others.” Some people cannot tolerate any advice to take money off the table. I received numerous nasty emails including one from an engineer in Germany telling me that “you have no knowledge of mathematics or value” to suggest that the tech stocks and internets were overvalued.  He had the market all figured out and stated that there would be no major decline. The market collapsed and terrible damage was done.

 

 Today we have that same valuation warning so keep that in mind. Using the “Stocks to GDP” indicator suggests that there is a strong possibility of a 20% to 25% decline in front of us. However, the ingredients of rising rates, contraction of the money supply and a recession are not in place. Thus the timing will probably be off. But prudence and some profit taking are strongly recommended. How long can the Fed support the high valuations? We do not want to see a bear market. But I have to suggest that there will be a time when we will be able to invest in most stocks at cheaper prices. There will be a “sale” and few investors will take advantage. It is always that way.