Binary bet of the week: Should we really party like it’s 1999?
By Dave Evans of Binary.com
This week there have been numerous newspaper headlines riffing on a similar theme – “Stock markets party like its 1999”. If only Prince received royalties for such headlines!
FTSE 100 Monthly Chart
After the bursting of the tech bubble, the financial crisis and the Euro troubles, the FTSE 100 finally surpassed the closing highs it set on the eve of the Millennium. As important as this milestone is, it should be put into context as the German Dax has long since said goodbye to its 2000 and 2007 highs, while the broad S&P 500 seems to have been making new record highs virtually every month since 2013.
Nasdaq 100 Monthly Chart
Perhaps the greatest milestone is the Nasdaq 100 currently trading at its highest ever monthly close (though still a little way off its all time high). The Nasdaq was home to the frothiest of technology companies, with college graduates receiving eye watering sums of money to do wonders with ‘this internet thing’. That this bastion of technology hyperbole is back at the highs surely speaks the most about current highs.
So should we be worried that we’re heading for disaster, just like we were the last time the Nasdaq and Co. were at these levels? Sadly there are some signals that the party has got a little out of hand.
Shiller’s Warning
While most people were ready to pop the Champaign corks, Harvard professor Robert Shiller quietly reminded everyone that markets are running hot with a tweet about the latest valuation levels from his Cyclically Adjusted Price Earnings ratio.
Shiller’s CAPE or PE/10 now stands at 27.85 using the most up to date data, which is the highest since 2002 when the S&P 500 was still trying to shake off the worst excesses of the tech bubble. In terms of eras, it’s the third highest valuation phase behind the tech bubble and 1929 great depression.
Shiller’s CAPE
Are the current state of affairs the new normal?
There are some criticisms of the Shiller CAPE method in that it doesn’t take into account recent accounting changes, but this isn’t the only valuation that’s flashing red right now.
Market statistics website AdvisorPrespectives.com keeps track of not one, but four such valuation metrics including the CAPE, the Crestmont Research P/E ratio, the Q Ratio (market price divided by replacement cost) and the S&P 500 compared to its regression trendline.
Each of these metrics is distinct, yet all four are at elevated levels.
Dshort.com valuation metrics
Source: http://www.advisorperspectives.com/dshort/updates/Market-Valuation-Overview.php
The chart is essentially saying that current market valuations are currently 77% above their averages, or around two standard deviations higher than typical levels.
There are of course many things that we could be worried about besides how expensive stock markets are – the escalating tensions with Russia at the very least. Yet there is a current train of thought that we are in uncharted territory – and this much is true. Never before have central banks supported liquidity in this way and never have interest rates been so low for so long.
There is also the fact that an expensive valuation is not a clear cut sell signal. Indeed, markets can remain overbought and still keep going up for a good while, just like the UK housing market did in the run up to the 2008 crash.
While the momentum remains bullish, it could pay to not fight the trend, but when this trend turns – run. Don’t walk.
Disclaimer: This financial market report is intended for educational and information purposes only. It should not be construed as investment or financial advice and you should not rely on any of its content to make or refrain from making any investment decisions. Binary.com accepts no liability whatsoever for any losses incurred by users in their trading. Fixed odds trading may incur losses as well as gains.
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