Equity ratios trigger alarm bells
S&P 500 Index has stayed higher for longer only twice before, each time ending with crashes, writes Michel Pireu
Valuation, history shows, is an awful tool for market timing. Equity cycles persist, and selling just because price-earnings ratios are high has repeatedly proven a mistake. But what if the persistence starts pushing up against history? Consider the S&P 500 Index, which has spent 42 months trading in the upper reaches of one range, the cyclically adjusted price-to-earnings ratio. Only twice before has it stayed higher for longer, each time ending with crashes, in 2000 and 2007. To say this is not bothering investors would be an understatement. About $2-trillion has been added to US share values in eight weeks, with price momentum in the Dow Jones Industrial Average at levels not seen since the internet bubble. Bulls, firmly in charge, are convinced Donald Trump will inaugurate a cycle of profit growth that reins in valuations. Maybe. But to get where bulls think earnings are going, the economy would have to pull off a feat of strength that is unprecedented since at least 1937. Speci...
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