It’s been in the news for weeks.
“DOW APPROACHES 20,000!!” The news anchors say excitedly.
Newspaper headlines blare: ECONOMY IS IN RECOVERY. UNEMPLOYMENT IS AT AN ALL TIME LOW. MONEY IS LITERALLY RAINING DOWN FROM THE SKY.
But is the DJIA hitting 20,000 really a good thing?
When the economy enters into what the financial world deems as recovery, costs begin to increase. Unemployment decreases, but wages do as well. The Fed hikes up interest rates. Companies feel the heat, as earnings plunge, stocks slide, and then BOOM.
Another 2008. Another bubble. Another generation that has to deal with economic turmoil, preventing the growth that America desperately needs.
When will we learn?
The US stock market is extremely overvalued. It has to revert to the mean at some point, and that involves a decrease (yes, it IS possible for the market to go down, despite current sentiment).
People have to prepare themselves for the impeding movement. The market simply can’t keep going up. Sure, it can move higher and higher for an extended period of time, but the higher the stocks go, the farther they will fall.
This is simply a report on the mathematics and history of the marketplace. One only has to look back at pre-2008, pre-2000, even pre-1929 to see the massive overvaluation that lead to bubbles that EXPLODED on to the average consumer.
There are multiple measures that one can look at to see the overvalution of the market.
Stocks are worth 125% of gross domestic product, pitted against an average of 65% since 1945. That means that stocks are far more expensive relative to the output that the USA produces.
They are also trading at 53 times annual dividends, with the historical average cited by Yale finance professor Robert Shiller only at 23 times dividends.
On the aggregate, US stocks are wildly above historical averages. This can equate to an overvaluation, or we can convince ourselves that this time it will be different. This time, the bubble won’t burst! This time, we won’t be stuck in a cycle of extreme booms and bust.
Market history begs to differ.
Disclaimer: These views are not investment advice, and should not be interpreted as such. These views are my own, and do not represent my employer. Trading has risk. Big risk. Make sure that you can balance your risk/reward, and trade small, and trade often.