How Far Can The Stock Market Run?

Updated:  October 15

Very little to the upside.  Very much to the downside.

Macro Valuation Metrics

Lots of incoming over our S&P Shooting Star post, most of which can mostly be summed up to the effect, “Why so bearish?

Seriously?   Our predisposition to the market is always anchored in time tested valuation metrics, which are hard to manipulate.  That is why we like market capitalization deflated by some macro variables, such as nominal GDP or wages.

Micro measures, such as Price-to-Earnings are way too distorted by buybacks and can be easily manipulated by CFOs, who play around with variables such as depreciation or loss reserves.

Our two favorite are  1) market cap-to-GDP,  which, according to Warren Buffet is,  “the best single measure of where valuations stand at any given moment.”   Take a look at the following chart and you will understand why the Oracle of Omaha is sitting on a record $122 billion stockpile of cash,  2) the number of hours of work needed to buy the S&P500, not a perfect valuation measure but does track our other favorite quite well.  The average person, making the average salary is not a big holder of stocks but the metric does give a heads up when the stock market becomes divorced from the underlying economic trend.

Take a look at the data and you decide, folks.   Keep in mind, the charts are ratios, not price indices, and can’t continue to rise from lower left to upper right,  forever.

Turn off the talking heads on bubble vision and #FinTwit, who will find it difficult to interpret the following charts because their salaries and year-end bonuses depend on their not understanding them or are incentivized to dismiss them outright.

Valuation Metric_Buffet Indicator        Source:  Advisor Perspectives

 

Valuation Metric_S&P Hours

Run Forest Run

Can markets, once again, convince themselves that historic valuations no longer matter?  That this time is different?

Possibly,  but they will need a prevailing narrative  to fuel the delusion.

Quantitative Easing Forever

It could come in the form QE Forever, which we don’t think is very probable.  That jig is almost up and any further rise in inflation will put a stake through its heart.  The Cleveland Fed’s median CPI just pierced 3 percent for the first time since the Great Financial Crisis (GFC).

HMedian CPI

Source:  The Daily Shot

AI

Artificial Intelligence?   This is the one to watch, which will be a major disruptive force for decades to come.

The theme goes something like this:  Companies can lay off all their workers and replace them with machines and algorithms, which will inflate margins to infinity and beyond.

The problem with this scenario is it would crush aggregate demand and economic growth.  The geniuses are trying to find a balance and, thus far, have come up with concepts such as Universal Basic Income (UBI) and Modern Monetary Theory (MMT).

Stay tuned.

Wake us up after the above charts regress to their means, about 40 percent lower.

Running Out Of Free Lunches

We are almost out of free lunches, folks, and will be posting only sporadically unless your support increases.   Donate whatever you think is fair by clicking on the PayPal button just below the Twitter and search icons on the upper right-hand side of the blog.  You do not need a PayPal account and can use almost any credit card.

Don’t be a free rider.  Thanks, so much.

free rider

This entry was posted in Economics, Equities, Uncategorized and tagged , , . Bookmark the permalink.

72 Responses to How Far Can The Stock Market Run?

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  7. Anonymous says:

    God, you’re so insightful. Thank you so much for re-posting D-short graphs and asking to get paid for it! Awesome work brah!

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  36. jeremywhittaker says:

    Simple but great analysis. The part I think that you may be off on is QE forever. How do we gauge the limits of how far it can run? Will the fed who follows the tweets of Trump really care about inflation until it becomes hyper? And even then chances are the mentality will just be, “it’s the next guys problem”.

    • macromon says:

      Not sure, but inflation at, say 4 percent, the markets should begin to force their hand. Thanks for the comment, JW.

    • macromon says:

      Jeremy, You need to create a ratio from those two time-series. Most time-series charts look like that. It is important to look at deviations from both trends, which is now at historic levels for stocks and the economy. I would be interested to see Stock Cap/M2… Though M2 is an economic indicator almost as archaic as horseshoe prices.

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  38. Ol’dan says:

    Really good stuff. Sadly I don’t use Pay Pal or give out my credit card.
    Accessing my g Mail is sporadic but U can try. Send an address and i’ll Mail a donation.

    • macromon says:

      No worries. Enjoy the ride!

      • Stuart Hanson says:

        Ol Don: It’s 2020 The Russians, Chinese and NoKo’s already have your cc numbers and your SSN and address, and pictures of your face, too. Charge a donation and if something weird shows up on your card dispute and cancel it.

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  45. Barry S. says:

    Very good!

  46. This is the first time I saw your article. I agree that there is no free-lunch but nothing gets to my credit card. I can send you a check if you give me an address but, as a small investor, what’s in it for me? I linked because I wanted to read Warren Buffett’s reasoning on holding cash.

  47. Anonymous says:

    U R screwed up with these charts…
    The only reason WB sits on the sidelines is because of Dumbo Trumps policies & actions…

    • macromon says:

      You may be right, I have no idea what motivates, WB. But look at the charts. Do you think the market can continue to outpace the economy? Even if stocks returned 5 percent for the next 20 years in an economy that grows at 3% with 2% inflation, the chart would still be at record highs.

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