A look at some of the important quantitative metrics that influence the stock market.
July 24, 2014 Commentary
Positive outlook, but…
Overall, our metrics continue to indicate a positive outlook for the market.
However, one of our key measures has shifted from “neutral” to “bad” and this one is especially worth examining because it supports some of the recent talk suggesting that we’re in a bubble. The metric, S&P 500 earnings to price change, compares how much earnings have gone up to how much stock prices have changed. In a normal situation we’d expect this ratio to be near 1.0 — indicating that revenue and price are moving in step. The value is 0.63 which indicates prices are moving up much faster than revenues. This may indicate an overvalued stock market.
Are we reaching the top of a bubble?
David Leonhardt at the New York Times suggests that we may be:
While the rest of economy has been growing frustratingly slowly for almost five years, stocks have been rising at a boomlike clip. An investment in the Standard & Poor 500-stock index would have doubled from early 2009 through early 2013 and then gained an additional 18 percent over the last year.
Relative to long-term corporate earnings – and more in a minute on why that measure is important – stocks have been more expensive only three times over the past century than they are today, according to data from Robert Shiller, a Nobel laureate in economics. Those other three periods are not exactly reassuring, either: the 1920s, the late 1990s and in the prelude to the 2007 financial crisis.
Here’s another article that states: “We’re in the third biggest stock bubble in U.S. history.”
On the other hand “well-known strategist and long-time bull Richard Bernstein scoffs at the notion equities are in a bubble and insists the biggest bull market of his career still has further to run.”
What’s the take home message?
Read the full blog here: Augmented Trader: Market Metrics - Are We in a Bubble?