Market Mania?

12/12/2016 8:00 am EST


Alan Newman

Founder, Crosscurrents Publications, LLC

The election of Donald Trump has negative implications for the next few years, but that conclusion would be the same had Hillary Clinton won the White House; the basic problem as we see it is the continued gross overvaluation of the stock market, cautions Alan Newman, editor of Crosscurrents.

The Trump rally has extended the Dow Industrials, the S&P 500 and the Nasdaq Composite to new highs in spectacular fashion.

But the Nasdaq 100, the Dow Utilities, and the Dow Transports do not seem inclined to participate. Breadth is far from what you’d expect to accompany record new index highs.
We admit there is bound to be plenty of sponsorship from stock buybacks in 2017 but companies are going to be buying grossly overvalued shares.

The S&P 500 is now extraordinarily high at a 25.5 P/E, and the dividend yield of 2.1% is nothing to rejoice about particularly with interest rates destined to rise at the Fed’s December meeting.

Let’s assume Trump’s plans for a significant cut in corporate taxes pushes 2017 S&P 500 earnings up more than 10% from the current $87 to $96 per share. That would still mean a P/E of 22.8 for an index that historically has averaged a P/E of roughly 15.

The cyclically adjusted P/E (CAPE), a valuation measure created by economist Robert Shiller now stands over 27 and has been exceeded only in the 1929 mania, the 2000 tech mania and the 2007 housing and stock bubble.

Even with a 10% earnings boost, we’re still dealing with the same picture -- overvaluation on a very grand scale.

Despite the recent move to higher rates, Charles Biderman’s TrimTabs reported a $44.6 billion inflow into equity ETFs following the election.

It was the second largest surge ever and was exceeded only by the record holder, July 2007. Stocks peaked just three months later, followed by one of the most punishing bears in history.

Total margin debt (data includes the NYSE and NASD) now stands at $540.6 billion and is up $53 billion in just the last three months. Add in a very rapid turn to excessive optimism and we have the perfect recipe for a correction to commence.

There is strong evidence that another mania is in progress, fueled by institutions completely caught up in the belief it is truly different this time. This is exactly how manias end.

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By Alan Newman, Editor of Crosscurrents

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