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Market Valuations PDF Print E-mail
Written by Dan Petrey   
February 16, 2017

Not only is the country divided on many; political, social, racial, and economic issues, but analysts are also divided on whether the market is undervalued or overvalued. (As if what they think matters.)  Human beings and their environment tend to run in cycles.  I am personally undetermined whether that is a definite law of physics or just an end result of human sociology/psychology.  I tend to think the former as even nature itself cycles from one season to another and one day to another.  So, when everyone is psychologically afraid of missing out on the certainty of future gains it just might be time for the cycle to reverse, or at least take a breather.

Many of you might be aware that I tend to believe this Stock Market rally has been fueled by ridiculously cheap money, and our economy has not had any fundamental game changers since the technological revolution to fuel an economic expansion that correlates with such a strong stock market.  I also believe that human emotions can push markets to ridiculous valuations before the music stops playing and every individual on the dance floor runs for the nearest exit as if someone just screamed fire. There are numerous statistics to measure; valuations, sentiment, and momentum, but I am going to look closer at one that correlates to economic output and Warren Buffett looks to for valuation metrics.

According to Mr. Buffett, the percentage of Total Market Cap or “TMC” relative to the US GNP is “probably the best single measure of where valuations stand at any given moment.”  Of course, there are other factors besides valuations that affect stock prices, but according to this valuation metric (which currently stands at 129.6 %) the market is significantly overvalued.  I won’t give you all the ranges but according to this statistical ratio anything greater than 115% is significantly overvalued and anything under 50% is significantly undervalued.  So, according to this valuation metric the market is overvalued, but this does not necessarily mean impending doom to stock prices as there does seem to be momentum behind this market. 

I like to say that the market likes to prove everyone wrong and what I mean by that is just when everybody thinks things can’t get any better and the last retail buyer jumps on board (because they are afraid they are going to miss out) is when the train derails.  The opposite is true at market bottoms.  Such is the cycle of stock prices and market valuations. 

Interest rates, and corporate profitability also affect stock prices and one can never be sure how high is too high.  With the amount of liquidity (in the form of cheap money) sloshing around the world stocks may just get more extremely valued.  So, although there may be warning signs it does not necessarily mean one should sell or seriously alter their portfolios.  I am obsessively curious wondering what exactly will be the spark that reverses this bullish stock market cycle. 

No team wins all their games and no team stays good or bad forever.  No hitter gets outs all the time and no hitter gets hits all the time.  Shooters can get hot as they say, but they will eventually miss.  The sun will set tonight and the moon will rise and I am pretty confident that the cycle will soon repeat in about twenty four hours.  Just remember, the longer the cycle, the more difficult it can be to determine the exact point at which the pendulum will stop and reverse.  Pondering the length of some cycles, think of the last Ice Age and how long it lasted, which was a long time in human years.  How long before that cycle repeats, and how long would it feel like the cycle would never end if one were in it?   Such is life as we know it.  

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