Why Market is not in a bubbleAMEX:SPY
TVC:SPX
QUANDL:MULTPL/SHILLER_PE_RATIO_MONTH
Forget Fear and Make Money
* My English is not good enough, so I make it short and put everything you need to know on the chart.
1- What is Shiller P/E? (Wikipedia))
The cyclically adjusted price-to-earnings ratio, commonly known as CAPE, Shiller P/E, or P/E 10 ratio, is a valuation measure usually applied to the US S&P 500 equity market. It is defined as price divided by the average of ten years of earnings (moving average), adjusted for inflation. As such, it is principally used to assess likely future returns from equities over timescales of 10 to 20 years, with higher than average CAPE values implying lower than average long-term annual average returns.
S&P 500 shiller P/E ratio compared to trailing 12 months P/E ratio
The ratio is used to gauge whether a stock is undervalued or overvalued by comparing its current market price to its inflation adjusted historical earnings record.
It is a variant of the more popular price to earning ratio and is calculated by dividing the current price of a stock by its average inflation adjusted earning over the last 10 years.
Using average earnings over the last decade helps to smooth out the impact of business cycles and other events and gives a better picture of a company's sustainable earning power.
The ratio was invented by American economist Robert Shiller.
It is not intended as an indicator of impending market crashes, although high CAPE values have been associated with such events.
* Many institutional investors use it as crash signal or buy signal.
2- What is Market Bubble?
Two conditions that define stock market bubbles are fast rising valuations and retail investor fervor, based on chart we don't have the first, and the second is just starting. (There is an article regarding this topic in business insider)
If you look at the chart and compare the Bubble crashes, it's so obvious why we are not in bubble, maybe in next 4 years we be in bubble but at the moment we are so lucky for this opportunity. The Covid has a solution, it means Trillion dollars from Bonds will be invest in market, the businesses will start making money, companies will grow by their own money and investments not by help of FED. it's the reason I'm bullish for a long time, we will see corrections, but I don't expect any crash soon. good luck and enjoy the strongest bullish market in history of wall-street.
Shillerpe
Distortion & misallocation & wealth transferThe chart says it all.
3 trillion increase in balance sheet in 2 or 3 months...
Party will go on as long as the long-term interest rate remains low...
Distortion - The massive rally has been partially fueled by $l8 trillion worth of fiscal and central bank stimulus. Short-term lending rate cut to near zero and long-term interest rates dropped to near all time low caused by massive QE.
Massive QE has distorted the interest rate so that the cost of capital is kept artificially low to the point that company is justified to undertake many projects that would not yield any productive return under the normal circumstances
Evolution of Fed's QE -
Treasury/municipal bonds-> corporate bond ETF-> individual corporate bond-> Yield curve control (in potential development)-> Maybe... Individual stocks in the future...
Even though Fed's purchase of individual bonds and ETF accounted for just a small percentage of overall bond market, I can't help but wonder why the Fed included lower-medium grade/slightly speculative bonds and bonds issued by financially healthy companies such as AT&T, UnitedHealth Group, and Walmart ?... to name a few.
Easy credit has undoubtedly kept some zombie company afloat when it is probably better for them to die off.
QE and forward guidance have resulted in high commercial bank deposits. Fortunately, as long as the circulation of velocity remains low and producer can keep up with the demand of good and service, the economy will not overheat.
Misallocation of capital - It is no surprise that American household's wealth is increasingly tied to stock market & real estate. As a result, there is a negative correlation between household wealth and interest rate.
The increased household consumption that results from the perceived gain in the stock market & real estate driven by low interest rate is the main culprit of chronic trade deficit.
Oh yeah, FAANG now collectively accounts for roughly 20% of top stock marketcap...
If it does not convince you that stock market is overvalued, just look at the ratio of total market cap over GDP (currently at 147.2%) and Shiller PE which is 13.1% higher than the recent 20-year average of 25.8.
Wealth transfer -
Pension fund, endowment, mutual fund and hedge fund are having a field day.
Maybe just a handful of investment groups are dictating the movement of the market. BlackRock alone has more than 7 trillion of AUM. Goldman Sachs, Bridgewater and few other investment groups also each controls more than hundred billions of asset.
It is hard to image that the quick reversal in the market is caused by a bunch of retail investors and traders panic sold in March, then immediately FOMO back into the market only a few weeks later.
