Overvalued Market With Adam Mesh What are the most overvalued stocks – April 2, 2017
Guest: Adam Mesh
Adam Mesh: It’s hard to explain how they got here. All of last year seem so real and how we went up and then the expectation was going to the election if Trump became President that we’d go down but then we just continued higher and now it seems that everybody is bullish.
David Scranton: It does seem that way. Have your concerns about the market being high, have they grown after the healthcare bill got shot down in Congress?
Adam Mesh: It just hard to buy up here because everything has come so far already. If you were going to see Hamilton in New York and you didn’t buy tickets because they were $250 would you pay a 1000? It’s the same thing right now with the market.
Other experts have argued that even that might be a little bit overly optimistic of a forecast. Maybe we should look to get Jack Bogle on one of our future shows coming up soon. Some have sited Warren Buffets well known Market Cap the GDP measuring stick and its correlation future tenure returns in the market. They point out that this gage currently implies an annual total return of -2.59% for the SNP 500 over the next decade even worse. The bottom line here is that even you reject all the potential warning signs. The market overvaluation loan suggest a pretty dismal future for committed stock investors, crash or no crash. We discussed this a bit on a previous show where I pointed out that with President Trump impact already priced into the markets even if he delivers on his promise of 4% economic growth additional positive impact for investors might just be minimal. That impact has already been felt. In other words, based on all the hope and optimism since Election Day. If on the other hand, we see tax plan and budget hit walls the same way as healthcare reform just did the downside effects are likely to be a lot more severe. Particularly if it triggers the next major stock market crash. History suggest the next major market drop will reach at least 35% and could very possibly be a steep as 70%. Its actual history that gives us another important detail relative to the markets overvaluation that we definitely should pay attention to. I’ve discussed price earns ratio before on the show and it’s a detail especially important this topic. Every stock price has a price to earnings ratio, a PE ratio and so does the overall stock market. It represents the stock markets price per share relative to its average earnings per share. When average stock prices get too high relative to cooperate earnings one of two things have to happen. Either cooperate earnings need to increase to grow into the over inflated prices. This, of course, takes a lot of time or prices need to shrink to really shrink down into match the new cooperate earnings. This can happen a lot more quickly. What’s interesting historically though is that when average PE rates show for the stock market overall get at or near 30 it seems to serve a clear sign they were about to slip into a long-term secular bear market cycle. This happen just before the crash of 2000 that began what I believe is our current long-term bear market cycle. It happen consistently with every long-term bear market cycle before that just as consistently none of these previous long-term bear market cycles have ended until price earnings ratio have shrunken back down into the single digits. As of right now, average PE ratios are still above 20. Nowhere near single digits. Ultimately then the market overvaluation is telling us two things. Neither of which is especially promising for buy and hold investors. One the markets overinflated and incapable of delivering much or if any additional growth even as the best case scenario. Two, it’s over-inflation relative to price-earnings ratios is another historical indicator that the current long-term secular bear market cycle is probably not over yet.
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