Notes: The Robert Shiller Price-Earnings ratio for the S&P 500 stock market index still shows how expensive stocks are, and how markets continue to dismiss political risk. The PE ratio in the graph above shows the price of stocks relative to the previous 10 years of earnings. Stocks today are the most expensive they've been in 20 years, notwithstanding the >12% selloff from January. Since then, stock prices have fallen in March, but the PE ratio is still around pre-1929 stock market crash levels. Note the high levels of the the PE ratio (i.e. stock prices) just before the 1929 and 2001 Dot-com crashes, levels we are close to today. Above is a “total return concept” that Yale economist Shiller now calculates. Shiller points out that “changes in corporate payout policy (i. e. share repurchases rather than dividends have now become a dominant approach in the United States for cash distribution to shareholders) may affect the level of the CAPE [PE] ratio through changing the growth rate of earnings per share… A total return CAPE corrects for this bias…”
Quote last week from a market participant:
“Markets were priced like the Straits of Hormuz were blockaded, and that was just not reasonable, and it's not like the Middle East suddenly was offline,” Harris Financial Group managing partner Jamie Cox said in a note. “Markets often have ‘hair on fire’ overreactions to world events which unlocks tremendous value for those who pay attention to the price dislocations.”
Cox was commenting on the rise in oil prices above $130, before falling back to <$110 by Friday.
But, as I have said before, markets are not great at assessing political risk. (See LinkedIn response to a Mohamed El-Erian post).
We all pay for this lack of foresight in terms of volatile and often overvalued markets prone to sharp corrections when political risk comes home to roost.
Sure, market participants who have a trader mentality love volatility. They trade on it, and if they make the right short-term bet, they profit handsomely -- as Cox noted. In addition to oil prices, the stock market has experienced sharp swings of late.
The Shiller Price-Earnings ratio for the S&P 500 stock market index (see chart above), while down a bit from January highs, still demonstrates how expensive stocks are today. It also shows how markets continue to dismiss political risk. Of course, low interest rates have buoyed stock prices in recent years, but this is changing now as well.
The PE ratio shows the price of stocks relative to the previous 10 years of earnings. Stocks today are the most expensive they've been in 20 years. The PE ratio (i.e. stock prices) is close to the very high levels seen before the 1929 and 2001 Dot.com stock market crashes.
Markets today underestimate the stresses of globalization & technological change on societies, the effects of populism & polarization and of unsettled geopolitical issues in Asia, Europe and elsewhere (currently underscored by war in Ukraine), and the impact of climate change and the pandemic.
Above all, markets disregard the failure of democracies thus far to develop an effective response to America's "hegemonic decline." American power is declining relative to other countries, and this increases uncertainty about what comes next.
A case in point on such market blinders to political risk is the 2016 election of Donald Trump.
When Trump took office, markets focused on tax cuts and deregulation, seen as positive for corporate profits. What they missed was the broadside that Trump -- and similar political outcomes around the world -- have represented to the US-led global order that has underpinned unprecedented worldwide prosperity since WWII. Markets have powered higher despite warning lights for the long run in the US: poor education outcomes, rising inequality, declining life expectancy, rising debt and gridlock.
So again, market participants would do well to hire analysts with expertise in political risk.
#stockmarket #markets #globalization #politicalrisk #us .