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Market valuations are painfully high?

The major averages continue to surge higher on little news and thin volume pushing valuations to increasingly unsustainable levels particularly in light of persistently falling sales and earnings.  The PPI or Producer Price Index gained .5% in June on increasing energy and services costs.  On a year ago basis prices are increasing again up .3%.

The California Policy Center published an interesting study looking at market valuations and the effects this might have on overextended pension funds.  Using data on the Standard and Poors 500 Index the study noted that the P/E or Price to Earnings ratio stood at 25.9 much higher than its average of 16.  While this figure has been exceeded 3 times previously in 1929, 2000 and 2007 bad things happened.  Moving to Price to Sales or P/S ratio and gross overvaluation is indicated as well with the P/S ratio at 2.1 this is far higher than that seen in 2000 when it reached 1.6, 2008 saw 1.8 the average is just .9.

Moving to market capitalization as a percentage of GDP or Gross Domestic Product and we find a figure of 196.5% slightly below its all-time high of 209% set in 2015.  Just before the dot-bomb crash in 2000 it reached 204% and prior to the 2008-2009 crisis it was 183%.  The study went on to conclude that losses would likely be severe if the market returned to average valuations, no surprise there.  This study was based on data through last year given what we have seen since it’s a pretty safe bet that all of these valuation metrics have moved higher since.  Not to worry though as its always a great time to buy, just ask an analyst.

This is Caleb Lawrence Registered Investment Adviser Scotts Valley Drive and Willis Road in the Scotts Valley Plaza, Suite 202 or call me toll free at 888-RICH PIG / 888-742-4744.

You can catch me on the radio at noon each business day as well on California’s central coast.  KPIG 107.5 FM in the Monterey Bay or KPYG 94.9 FM in San Luis Obispo.

Rebroadcasts, additional writings and other entries are also available on my Blog at www.clinvestments.com

Advisory services offered through Caleb Lawrence Registered Investment Adviser Inc.

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