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Articles

Stock Market Correction Coming Soon

By LINDON, Utah - January 27, 2017 No Comments

Are Your Stocks Over-Valued? Warren Buffet and Robert Schiller Think So

Stock Market CorrectionMany believe the stock market is headed towards a major correction. Or a crash.

President Trump, throughout his campaign, called it a “big, fat, ugly, bubble.” And his appointment of Carl Icahn as special advisor to his administration signals that his view has not changed.  Icahn, in a recent interview with CNBC said “If you’re asking me am I concerned about the market on the short term. Yeah, I’m concerned about it.” And in DangerAhead, he warned about how dangerous the situation has become:

“I’ve seen this before a number of times. I been around a long time and I saw it ’69, ’74, ’79, ’87 and then 2000 wasn’t pretty. A time is coming that might make some of those times look pretty good… The public, they got screwed in ’08. They’re gonna get screwed again. I think it was Santayana that said, ‘those who do not learn from history are doomed to repeat it,’ and I am afraid we’re going down that road.”

Other analysts and traders are also predicting a major correction at some point in the near future and they are carefully watching and analyzing the following two well-known and respected indicators: The Schiller P/E and the Buffett Indicator.

First, the Schiller P/E, also called CAPE (Cyclically Adjusted Price to Earnings ratio.)
Robert Schiller, a well known Nobel Laureate and Yale economics professor, created this ratio to measure market valuation. It is the price divided by the average of ten years of earnings, adjusted for inflation. Right now CAPE is 28.5. That is 70% higher than the historical average—strongly signaling that stocks are overvalued. The 10-year average is around 16. Only several other times in our history has CAPE been this high—including right before the 1929 market crash and Great Depression. It also reached near historical highs during 2000 and again in 2007. Each time it was followed by a crash.

Graph-1

Source: https://www.quandl.com/data/MULTPL/SHILLER_PE_RATIO_MONTH-Shiller-PE-Ratio-by-Month

Second, the Buffett indicator.  This indicator, named for Warren Buffett who claims it as “the single best measure of where valuations stand,” is the market cap (i.e. corporate equities) to GDP ratio.  It is currently at 123%.  In this case (where the numerator (market cap) starts to exceed the denominator (GDP)--i.e. gets over 100%, then the stock market has entered into dangerously overvalued territory. During the Internet bubble, it reached 153% and the bubble burst.

Graph-2

Source:  https://www.advisorperspectives.com/dshort/updates/2017/02/02/market-cap-to-gdp-an-updated-look-at-the-buffett-valuation-indicator

Based on these indicators, it seems best-case scenario that a bear market is coming.  Possibly, a significant correction. Worse case, huge market losses or a prolonged market crash.

Are you protected if that happens or is your wealth all resting on the shaky foundation of the stock market?  Investors all around the country are diversifying their portfolios in anticipation of what’s ahead.  They know that holding something more than a paper asset is important in these incredibly uncertain times. Moving some of your hard-earned money into hard assets is a smart choice as a hedge against a wild stock market fluctuation.  Generally, hard assets (i.e. commodities like gold, silver, farmland and oil) are negatively correlated to stocks and bonds.  Things like gold and silver have intrinsic value and are much less vulnerable in volatile economic times. They are a safe haven and significant hedge against cataclysmic events…like a stock market crash. Don’t be holding only paper when it happens. Be holding some physical assets like gold and silver too.

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