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We Have Not Seen This From The Stock Market in The Previous 100 Years

CAMS Weekly View from the Corner – Week ending 4/9/21

April 12, 2021

“Is the stock market too expensive and if so, when is it going to go down again?” Conversely, “The stock market is cheap – back up the truck and buy” is an often heard statement along the stock market timeline. The phrase “expensive” or “cheap” is often tossed around either as a question or as a statement when it comes to the market. Interestingly, regardless of whether the stock market is considered overvalued or undervalued, through the lens of valuation measurements, those conclusions historically offer little-to-poor guidance, in the near-term, as to how the stock market is going to perform. If you want to lose out on notable upside opportunity simply run a valuation measurement concluding the stock market is overvalued and in-turn sell everything thinking the end is near. Conversely, if you want to lose a lot of money run a valuation measurement concluding the market is cheap and in-turn, back up your personal money truck to buy all you can buy convinced that the market is about to roar higher – because “hey it is cheap!”. The point to all of the above is valuation measures are next to worthless for what is known as “timing tools” for the stock market. That is, their usefulness as a tool to tell you when the market is going to go down or up is very poor. Why Bother Valuing the Stock Market Then? In our view, it is imperative to know the overall valuation backdrop of the stock market. This is not in order to time the market but rather to truly know just what type of “market water” we are swimming in if you will. Knowing how expensive or cheap the stock market is, through the lens of historical comparison, aids in informing us to heighten our focus because perhaps the stock market is extremely expensive or cheap. Through this, it may be suggesting the time is getting closer to in fact run or conversely, to back up the aforementioned truck.

Speaking to our subject title today we share the above (nearly) 100 year view of the total stock market value compared to the size of the economy.  This dates back to 1924 as our starting point.  It simply adds up the total value of the stock market and puts it in relation to, as a percentage of the overall economy.  Simply, if the above registers 50% that means the total stock market value is half the total of Gross Domestic Product (GDP) which is used to measure the size of the overall economy. Furthermore, if the above registers 100% that means it is equal to the size of GDP.  Anything over 100% means the value of the total stock market is greater than GDP.  This is one of many tools we can use to get a sense of how expensive or cheap the stock market is through a historical lens when comparing its total value to the total value of economic activity. In looking at the chart, the far right side informs us that we have not been close to these levels in the previous century.  Notably, this includes well recognized historical stock market experiences such as the 1929 peak (roaring 20’s bubble) and ensuing crash as well as more recent times such as the 1990’s peak (dotcom bubble) and ensuing crash and the 2008 peak (housing bubble) and ensuing crash. That informs us, through this valuation measure, that our current stock market is very expensive. Importantly, as shared above, it does not tell us whether the stock market is about to go lower.  It informs us that we are priced at incredibly stretched valuation levels – over 200% of the overall economy which means it is twice the size of the economy. Federal Reserve In looking at the chart in total we have noted various periods with red lines.  Note the red horizontal line that encompasses the bulk of the chart.  This highlights what had been a high level mark in this valuation history for over 70 of the 100 years depicted.  This includes and in fact notes the top of the famous 1920’s runaway market which led to the 1929 peak and then crash. We also highlight the extreme peaks and troughs that have occurred since the latter 1990’s.  Since the start of the 21st century, the stock market has been a series of runaway trends and then cliff-dives.  This is truly different behavior in the previous 20 years than the prior 70 plus years. The Federal Reserve’s rampant money printing has certainly played a role in this runaway speculation.  For perspective, their Balance Sheet in 2002 was $700 Billion – which had grown to that level since their inception beginning in 1914 – nearly 90 years in time.  In 19 years, from 2002 up to current day 2021, their $700 Billion Balance Sheet has been printed up to $7.7 Trillion – not a typo.  That is $7 Trillion printed in 19 years.  That is a lot of money printing in a relatively short amount of history.  Per the above, markets reflect it with their extreme behaviors here in the 21st century. Again, this tells us nothing about near-term market trend but it does inform us that we are swimming in some very expensive market waters. I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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