Robert Shiller’s innovative, cyclically-adjusted model for measuring price-to-earnings ratios, which uses the average real earnings of the past 10 years, shows that stocks are highly overvalued (and getting more so). In fact, current valuations correspond to most of the greatest stock tops over the last century.
See for yourself…
Yes, such ratios were higher in the tech bubble that peaked in March 2000. But that was the greatest bubble in modern history. The second greatest was the auto and farm bubble of the Roaring 20s, which culminated on Black Tuesday.
But those are what I call rare and primary bubbles that see the combination of very strong demographic trends and surging technology penetrations like automobiles and the Internet. Don’t expect a repeat.
That’s not to say we’re not in a bubble right now. It IS to say that the market is now high on the fumes of its own success and will come crashing down soon enough.
My opinion of this is confirmed when I consider the Geopolitical Cycle, which alternates between positive and negative every 17 to 18 years. During negative cycles, like the one we’re in now (from 2001 to 2019), stocks have roughly half the valuations than they do during the positive cycle.
Basically, this means that we’re extremely overvalued for this point in the negative Geopolitical Cycle. Only if we were in the positive cycle could we expect to see a repeat of the 1920s and 2000s bubbles and valuations.
Markets may go up some more, but we’re heading into the worst part of the Geopolitical Cycle, so stay very cautious. and close to your Wealth Preserver charts.
With worsening demographic trends and unprecedented debt ratios around the world, every day the market goes higher, the riskier things get.
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Livio S. Nespoli has been a broker, registered investment advisor, and financial publisher since 1985.