Global Economic Intersection
Advertisement
  • Home
  • Economics
  • Finance
  • Politics
  • Investments
    • Invest in Amazon $250
  • Cryptocurrency
    • Best Bitcoin Accounts
    • Bitcoin Robot
      • Quantum AI
      • Bitcoin Era
      • Bitcoin Aussie System
      • Bitcoin Profit
      • Bitcoin Code
      • eKrona Cryptocurrency
      • Bitcoin Up
      • Bitcoin Prime
      • Yuan Pay Group
      • Immediate Profit
      • BitQH
      • Bitcoin Loophole
      • Crypto Boom
      • Bitcoin Treasure
      • Bitcoin Lucro
      • Bitcoin System
      • Oil Profit
      • The News Spy
      • Bitcoin Buyer
      • Bitcoin Inform
      • Immediate Edge
      • Bitcoin Evolution
      • Cryptohopper
      • Ethereum Trader
      • BitQL
      • Quantum Code
      • Bitcoin Revolution
      • British Trade Platform
      • British Bitcoin Profit
    • Bitcoin Reddit
    • Celebrities
      • Dr. Chris Brown Bitcoin
      • Teeka Tiwari Bitcoin
      • Russell Brand Bitcoin
      • Holly Willoughby Bitcoin
No Result
View All Result
  • Home
  • Economics
  • Finance
  • Politics
  • Investments
    • Invest in Amazon $250
  • Cryptocurrency
    • Best Bitcoin Accounts
    • Bitcoin Robot
      • Quantum AI
      • Bitcoin Era
      • Bitcoin Aussie System
      • Bitcoin Profit
      • Bitcoin Code
      • eKrona Cryptocurrency
      • Bitcoin Up
      • Bitcoin Prime
      • Yuan Pay Group
      • Immediate Profit
      • BitQH
      • Bitcoin Loophole
      • Crypto Boom
      • Bitcoin Treasure
      • Bitcoin Lucro
      • Bitcoin System
      • Oil Profit
      • The News Spy
      • Bitcoin Buyer
      • Bitcoin Inform
      • Immediate Edge
      • Bitcoin Evolution
      • Cryptohopper
      • Ethereum Trader
      • BitQL
      • Quantum Code
      • Bitcoin Revolution
      • British Trade Platform
      • British Bitcoin Profit
    • Bitcoin Reddit
    • Celebrities
      • Dr. Chris Brown Bitcoin
      • Teeka Tiwari Bitcoin
      • Russell Brand Bitcoin
      • Holly Willoughby Bitcoin
No Result
View All Result
Global Economic Intersection
No Result
View All Result

Uncle Sam on Markets: Overvalued and Volatile

admin by admin
April 8, 2015
in Uncategorized
0
0
SHARES
3
VIEWS
Share on FacebookShare on Twitter

Investing Daily Article of the Week

by Richard Stavros

Over the past few weeks, the team at Utility Forecaster has written a series of articles focusing on the debate over whether it’s time for investors to turn away from utilities.

With the Federal Reserve poised to hike rates as the economy continues to improve, the conventional wisdom is that utilities will fall out of favor with income investors as yields on Treasuries start to rise.

But as my colleague David Dittman has shown, utilities are still capable of outperforming the market even in a rising-rate environment.

Meanwhile, I’ve written about some economists’ concerns that the global recovery is being held back by disturbing deflationary trends. If underlying deflation continues to weigh on the global economy, then utility stocks’ safe-haven status should keep them in strong demand.

And while markets don’t always march in lockstep with economies, there’s growing evidence that another market shock could soon be in our future. If that ends up happening, then utilities would be obvious beneficiaries of the resulting flight to safety.

The latest brick in the market’s proverbial wall of worry comes courtesy of a recent report published by the U.S. Treasury’s Office of Financial Research (OFR).

In the report, entitled “Quicksilver Markets,” the author argues that by various measures the markets appear overvalued and due for a sharp correction.

The OFR observed:

“Although no one can predict the timing of market shocks, we can identify periods when asset prices appear abnormally high”.

The OFR, which was established as a sort of early-warning system to gauge risks to the country’s financial stability, is concerned that some market valuation metrics are nearing extreme highs.

Indeed, the market’s current bull run has already outlasted the average bull market by 15 months. And price gains have exceeded the average by 46 percentage points.

The Current Bull Market Has Advanced Further Than the Average
2014-04-02-U&I-Chart B

Of course, as the report concedes, the market can persist in this manner for some time. After all, longtime market watchers will recall that Alan Greenspan famously chastised investors for their “irrational exuberance” in late 1996, but it took another three-plus years for the bull market to finally peak.

While some have argued that historically low interest rates justify the market having a higher price-to-earnings ratio (P/E) than its long-term average, the agency notes that a period of low interest rates resulting from a weak economy could portend a lower long-term growth rate for corporate earnings.

Though an eventual rate hike will be predicated on further improvement in economic data, and that should, therefore, be bullish for stocks, there’s also a possibility that in a rising-rate cycle interest rates could behave in an unexpected and dramatic manner, which would adversely affect stock prices.

Two Sigma: The Case for Extreme Markets

But it’s not the market’s forward P/E that the report’s author finds alarming. While that metric is above its historical average, it’s not anywhere near the extremes of alternative valuation metrics such as the cyclically adjusted P/E ratio (CAPE), the Q-ratio, and the Buffett Indicator.

What constitutes an extreme reading for these metrics? The report defines an extreme level as two standard deviations (or two sigma) above the historical average.

That may sound hopelessly arcane to the average investor, but here’s why it matters: The OFR notes that valuations approached or surpassed two sigma in each major stock market bubble of the past century before they burst.

Here’s an overview of the OFR’s take on the latest readings from the three aforementioned alternative valuation metrics:

The CAPE Ratio:

The historical CAPE average is approximately 17 times, and its two-standard-deviation upper band is 30 times. That’s based on 133 years’ worth of market data.

The highest market peaks (1929, 1999, and 2007) either surpassed or approached this two-sigma level (1999 exceeded four sigma).

Each of these peaks was followed by a sharp decline in stock prices and adverse consequences for the real economy.

At the end of 2014, the CAPE ratio, at 27 times, was in the 94th percentile of historical observations and was approaching its two-sigma threshold.

The Q-Ratio:

The Q-ratio, defined here as the market value of non­financial corporate equities outstanding divided by net worth, also suggests equity valuations are approaching crit­ical levels.

Instead of using a traditional account­ing-based (historical cost) measure of net worth, the Q-ratio incorporates market value and replacement cost estimates.

The Q-ratio also includes a much broader universe of nonfinancial companies (private and public) than CAPE.

At the end of the third quarter of 2014, the Q-ratio was within shouting distance of the two-sigma level.

The Buffett Indicator:

The Buffett Indicator, which is the colloquial term for the ratio of corporate market value to gross national product (GNP), is at its highest level since 2000 and approaching the two-sigma threshold.

This metric is reportedly Berkshire Hathaway Chairman Warren Buffett’s preferred measure to assess overall market valuation.

Historically, this indicator has proved useful in identifying periods of extreme valuation, such as before the dot-com bubble burst and during the period leading up to the Great Recession.

At the end of the third quarter of 2014, this indicator was nearing the two-sigma mark.

Clearly, this analysis makes a strong case for why markets might not only be overvalued, but possibly headed for a correction.

But the government acknowledges that no metric is perfect, as changes in accounting standards, corporate-taxation policies, and approaches to inflation measurement can complicate analysis, especially when it’s applied to data gathered over the long term.

Beyond that, extreme valuations alone are not sufficient to trigger a downturn, but should be viewed within the context of corporate profitability. The current cycle can continue as long as revenue growth offsets margin pressures.

While Uncle Sam can’t predict when “quicksilver markets” will turn from tranquil to turbulent, we believe utilities are still the best place to be for income investors in this uncertain environment.

Previous Post

Deception Island – The Antarctic Volcano that Just doesn’t Make any Sense

Next Post

08Apr2015 Market Update: Averages Still In The Green, But Trending Down Off Morning Highs, Oils Mostly Trading Sideways And The U.S. Dollar Is Trending Upwards Ahead Of The FMOC Minutes

Related Posts

Is crypto investment safe?
Economics

Is Crypto Investment Safe?

by John Wanguba
March 21, 2023
Bitcoin Price Surge Breathes Life Into Collapsing Crypto Firms
Economics

Bitcoin Price Surge Breathes Life Into Collapsing Crypto Firms

by John Wanguba
March 21, 2023
Russians Overwhelm Kazakhstan With Sanction-Busting Requests – Sources
Business

Russians Overwhelm Kazakhstan With Sanction-Busting Requests – Sources

by John Wanguba
March 21, 2023
Ban CBDC Now! – Florida Governor Ron DeSantis
Economics

Ban CBDC Now! – Florida Governor Ron DeSantis

by John Wanguba
March 21, 2023
Microsoft Offers EU Remedies Seeking Approval On Activision Deal
Business

Microsoft Offers EU Remedies Seeking Approval On Activision Deal

by John Wanguba
March 21, 2023
Next Post

08Apr2015 Market Update: Averages Still In The Green, But Trending Down Off Morning Highs, Oils Mostly Trading Sideways And The U.S. Dollar Is Trending Upwards Ahead Of The FMOC Minutes

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Browse by Category

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized

Browse by Tags

adoption altcoins bank banking banks Binance Bitcoin Bitcoin market Bitcoin mining blockchain BTC business China crypto crypto adoption cryptocurrency crypto exchange crypto market crypto regulation decentralized finance DeFi Elon Musk ETH Ethereum Europe finance FTX inflation investment market analysis Metaverse mining NFT nonfungible tokens oil market price analysis recession regulation Russia stock market technology Tesla the UK the US Twitter

Archives

  • March 2023
  • February 2023
  • January 2023
  • December 2022
  • November 2022
  • October 2022
  • September 2022
  • August 2022
  • July 2022
  • June 2022
  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • August 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • December 2012
  • November 2012
  • October 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • April 2012
  • March 2012
  • February 2012
  • January 2012
  • December 2011
  • November 2011
  • October 2011
  • September 2011
  • August 2011
  • July 2011
  • June 2011
  • May 2011
  • April 2011
  • March 2011
  • February 2011
  • January 2011
  • December 2010
  • August 2010
  • August 2009

Categories

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized
Global Economic Intersection

After nearly 11 years of 24/7/365 operation, Global Economic Intersection co-founders Steven Hansen and John Lounsbury are retiring. The new owner, a global media company in London, is in the process of completing the set-up of Global Economic Intersection files in their system and publishing platform. The official website ownership transfer took place on 24 August.

Categories

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized

Recent Posts

  • Is Crypto Investment Safe?
  • Bitcoin Price Surge Breathes Life Into Collapsing Crypto Firms
  • Russians Overwhelm Kazakhstan With Sanction-Busting Requests – Sources

© Copyright 2021 EconIntersect - Economic news, analysis and opinion.

No Result
View All Result
  • Home
  • Contact Us
  • Bitcoin Robot
    • Bitcoin Profit
    • Bitcoin Code
    • Quantum AI
    • eKrona Cryptocurrency
    • Bitcoin Up
    • Bitcoin Prime
    • Yuan Pay Group
    • Immediate Profit
    • BitIQ
    • Bitcoin Loophole
    • Crypto Boom
    • Bitcoin Era
    • Bitcoin Treasure
    • Bitcoin Lucro
    • Bitcoin System
    • Oil Profit
    • The News Spy
    • British Bitcoin Profit
    • Bitcoin Trader
  • Bitcoin Reddit

© Copyright 2021 EconIntersect - Economic news, analysis and opinion.

en English
ar Arabicbg Bulgarianda Danishnl Dutchen Englishfi Finnishfr Frenchde Germanel Greekit Italianja Japaneselv Latvianno Norwegianpl Polishpt Portuguesero Romanianes Spanishsv Swedish