{"id":164799,"date":"2010-01-11T07:36:37","date_gmt":"2010-01-11T12:36:37","guid":{"rendered":"http:\/\/www.businessinsider.com\/henry-blodget-us-stocks-surge-back-into-bubble-territory-2010-1"},"modified":"2010-01-11T07:36:37","modified_gmt":"2010-01-11T12:36:37","slug":"us-stocks-surge-back-into-bubble-territory","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/164799","title":{"rendered":"US Stocks Surge Back Into Bubble Territory"},"content":{"rendered":"

Nothing like free money and the remembrance of good things past to drive stocks into the stratosphere.<\/p>\n

As the latest update of Professor Robert Shiller’s cyclically adjusted PE ratio shows, US stocks are now more than 30% overvalued, at 21X earnings.  That’s more reasonable than the 100%+ overvaluation in 2000, but it’s close to the level of the three other bubble peaks of the 20th Century: 1901, 1929, and 1966.<\/p>\n

Note also in this chart the fallacy of the “Fed model”, which argues that PEs should be high because interest rates are low, and vice versa.  That relationship has held for the last 30 years, but not earlier.  For two decades after the Great Depression (and, today, in Japan), interest rates were very low — and so were stock valuations.<\/p>\n

\"Robert<\/p>\n

Of course, today’s overvaluation doesn’t tell you much about what stocks will do next week, next year, or even the next 5-10 years.  As the chart above shows, before the 2007 market crash, stocks were overvalued for the better part of 20 years–and observing that didn’t help you make money.  On the contrary, it usually got you fired.<\/p>\n

What today’s valuation does suggest is that stocks are priced to return a bit less than average over the next decade, perhaps 3%-4% real per year (inflation adjusted), as compared to the 6%-7% average.<\/p>\n

Today’s valuations also suggest that stocks may have gotten way ahead of themselves, especially in light of the structural problems that will continue to bog down the economy.<\/p>\n

As the chart above illustrates, every one of the prior mega-busts in the past century has been followed by a “trough” in which the cyclically adjusted PE ratio hit the high single-digits.  We didn’t quite make it there in March (the P\/E bottomed around 12X), although we did get close.<\/p>\n

This, combined with what is likely to be a decade of deleveraging, consumer retrenchment, and sluggish growth as we work off our debt binge, suggests that we still yet might hit that single-digit low before we take off on another secular bull market again.  This could be achieved either through another market crash, or a prolonged period of backing and filling as earnings growth gradually reduces the long-term PE ratio (this is what happened in the 1970s).<\/p>\n

On the other hand, it is possible that that enormous stimulus and zero interest rates over the past two years will produce that “v-shaped” recovery.   At this point, given the extent of the recent rally, it would presumably have to be one heck of a “V” to send stocks soaring from here.  But the last eight months have already made idiots out of almost everyone.<\/p>\n

See Also:<\/strong> Here It Is, The Sign Of The Top<\/a><\/p>\n

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