Generational Dynamics

It's been only three weeks since I reported that the S&P 500 Price/Earnings ratio (stock valuation index) was at an astronomically high 20.98, indicating a huge stock market bubble. It was at 18 a year ago, and in the last three weeks it's shot up to 21.47, the Wall Street Journal on Friday, May 15.

 

At the same time, numerous economic indicators -- manufacturing activity, consumer confidence, retail sales, industrial production and GDP -- are all much softer tham mainstream economists were predicting. When those indicators are combined with poor economic performance in Europe, Japan and China, and a worldwide deflationary trend, there is plenty of evidence of a likely global economic slowdown. 

People frequently ask me whether Generational Dynamics can predict when the stock market bubble is going to burst, and a panic will occur. That cannot be predicted and, if it could, I would be rich. In fact, economists still don't even know for sure what triggered the panic and stock market crash of 1929, or why it didn't happen earlier or later. 

During the 2004-2007 time frame, it was obvious that there was a real estate bubble, and I begged a number of people not to buy homes, generally to no avail. Now I beg people to stay out of the stock market, with equal lack of success. It's heartbreaking to me to see this happen. 

The P/E index is well over 21 and is surging, indicating a rapidly growing stock market bubble. The historical average is 14, and as recently as 1982 it was around 6. It is an absolute guarantee that it will fall to around 5-6 again, pushing the Dow Jones Industrial Average to below 3000, far below the current index value of over 18,000. 

Anything might trigger a stock market panic. It might be something as simple as a speech, or it might be an exogenous event, such as a major international crisis. With almost the entire Mideast in flames, with Russia invading and annexing pieces of Ukraine, with China invading and annexing pieces of the South China Sea, something major could occur at any time. 

So, as I have in the past, I strongly urge readers to keep their assets in cash. In the deflationary environment of today, that's the best bet.

 The "New Era" is an Old Story 

John P. Hussman, Ph.D.

Put simply, there’s no evidence to suggest that historically reliable valuation measures have somehow become irrelevant. The most reliable measures we identify in market cycles across history are consistent with the expectation of near zero total returns in the S&P 500 Index over the coming decade, and the likelihood that the market will fall by half over the completion of the current cycle.

DYI Comments:  Professor Hussman you are being way too polite.  Here at DYI I'm anticipating a 45% to 60% decline over a one to two year time period.  My bet is that the markets will anticipate the ending of the 1st world Boomer's savings glut and begin their liquidation phase for retirement.  Of course, sell to whom?  With a much smaller and poorer generations Xer's and Millennial's prices will fall to attract buyers.

When it comes to stocks remember we are in a secular bear market that began in the year 2000 and has yet to complete it's journey to undervaluation.


My guess is that it will take two cyclical declines (and possibly three) from here to get to undervaluation.

The Great Wait Continues...

DYI