In one half (.05) of a second the Google search engine came up with 97,7000,000 results for “market bubble”.
Apparently our stock market is not the only bubble being talked about: Recently, if you are an avid reader of these missives, we’ve made you aware of another claimed bubble, as in fine art – Salvator Mundi, the auctioned Leonardo da Vinci depiction of Christ the Savior which sold at auction for $450.3 million. And, Bitcoin which reached a lofty price of $19,343 on December 16th, 2017 before dropping almost 40% to $11,682 as I write this on Thursday afternoon Jan. 18th…. Now that’s a ride!
Since we last published the chart below in October of last year conditions suggesting a continued rise in equity prices have improved. To gain clarity in estimating valuations and equity price direction, many years ago we developed our own analysis and method for assessing Equity valuations: The chart below is the result of our proprietary ** guessing apparatus.
Chart: Courtesy of Windsor Wealth.
So, if the RED line sits under the BLUE line equity are likely to decline according to this method.The opposite is true if the Red line is above the Blue line. How accurate is this method? There are very few things that are absolute; this is not one of them. However, the inflection points, the lines crossing, typically is indicative of a change in the character of the equity markets, we believe. So what is it telling us?
We believe equity markets are bullish for the foreseeable future. In the short-term, however, we remain cautious, there is less room for valuation errors based on expected earnings and interest rate changes. Corrections and consolidations are normal and should be expected. What we do not know is how long will consolidations be or how steep the correction will extend. However, we believe deep downdrafts occur during recessions, not bull markets.
And remember, please, “Forecasts create the mirage that the future is knowable.” – quote, attributed to Peter Bernstein.***
Stock market bubble? Not yet, in our opinion, at least not until earnings and the economy diverge from equity prices. For now enjoy the optimism, for this too shall change.
Our portfolios and strategies reflect overweighted positions in US and International Equities.
Carlos Dominguez, CFP® – Portfolio Manager
**The advisors at Windsor Wealth, developed a proprietary analysis and method based on earnings, actual and estimated as well as interest rate levels to ascertain possible inflection points in the US Equity Market.
*** Peter Lewyn Bernstein (January 22, 1919 – June 5, 2009) was an American financial historian, economist and educator whose development and refinement of the efficient-market hypothesis made him one of the country’s best-known authorities in popularizing and presenting investment economics to the general public
Chart Sources: The S&P Indices and S&P Global Co. – Earnings, actual and estimated as well as S&P historical prices. The Federal Reserve Bank of St. Louis for Interest rate data.
Salvator Muni’s sales price – https://www.cetusnews.com/business/Leonardo-Da-Vinci-s-Salvator-Mundi-Sold-For-Over-%24450-Millions-Breaking-World-Record.B1mqelO9Jz.html
Sources are being provided for information purposes only. Raymond James is not affiliated with and does not, authorize, or sponsor any of the listed sources. Raymond James is not responsible for the content of any source or the collection or use of information regarding any source’s users and/or members. Past performance may not be indicative of future results. The S&P 500 is an unmanaged index of 500 widely held stocks that is considered representative of the U.S. stock Market. Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Any opinions are those of Carlos Dominguez and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor recommendation. The information has been obtained from sources considered reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that any statements, opinions or forecasts provided herein will prove to be correct