The stock market, as defined by the Wilshire 5000 has fallen 35.1 percent from its closing high on February 19th and has been unable to sustain a decent bounce for more than a day.   Our favorite valuation metric, stock market capitalization-to-GDP has worked for us and is still not screaming cheap.

The chart above illustrates just how overvalued the market was at its peak.

The bursting of the stock market is one of several forces, including the bursting bond market bubble,  converging to create a perfect financial and economic storm and complicating the policy response to the coronavirus crisis.

As of today’s close, our estimate of the stock market capitalization-to-GDP ratio (Q1 GDP has to be estimated) puts it just 6.3 percent below the peak before the Great Financial Crisis (GFC).   We have been expecting a nut-cracking bear market rally but it has yet to materialize.  Possibly when Congress passes the stabilization passage now being debated.

Use Valuation Metrics As A Gas Gauge

The valuation metric has worked for us, and we compare it to a gas gauge to inform us that the tank is running low or high —  i.e, how much potential upside/downside there is in current prices — and not the exact spot where the market runs out of gas.   Trying to top-tick the high is a mug’s game, ask Issac Newton.

The higher the black line moves above past highs, the harder and more painful the fall, or a meaner regression to the mean.

Write that down, folks.

The question is have stock valuations “reached a permanently high plateau” as the famous economist, Irving Fisher, stated just a few weeks before Black Thursday 1929?

Believe it, if you wish.  After all, we now live in a culture and political environment where,

It’s not a lie if you believe it. 

To that, we say hogwash.  — GMM, Feb 17th 

Long-Term

We now view stocks at current levels as a gas tank one-quarter full and not yet conducive for a long-term rally or a market bottom.  After a bubble pops, stocks almost always overshoot their fair valuation level.

Falling From A Basement Window 

The following table is a list of price changes for key commodities from their recent highs.  The 75 percent move in RBOB gasoline is stunning and reflective of both a severe supply and demand shock.  Gas prices in the lower $1.00 range in California is going to be hard to believe.

Natty And Gold

Natural gas was already in a brutal bear market before the economic collapse and illustrates the trading dictum, “it’s hard to break your neck falling from a basement window.”

Gold is starting to take-off after the Fed has effectively nationalized much of financial markets over the past week.  As the Fed monetizes a large portion of what could be a $4 trillion deficit, we suspect gold moves much higher, easily taking out $1,700 level.

Wheat had a big move today over concerns about global supply chains.

As always, we reserve the right to be wrong.