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Lombardi Publishing Corporation (www.LombardiPublishing.com), a 29-year-old consumer publisher that has served over one million customers in 141 countries, warns that the stock market is overvalued by 68%, forecasting a major correction.“The U.S. stock market is on a tear: the NASDAQ is approaching 5,000, a level not seen since the dying days of the dot com era; the S&P 500 is at 2,100; and the Dow Jones Industrial Average is above 18,100,” says economist and lead contributor Michael Lombardi. “Wall Street might be euphoric, but I am worried. I see investors behaving like they do when markets are at their peaks or forming a top: I see irrationality, extreme valuations, and too much optimism.”
One key stock market valuation tool, the CAPE ratio of the S&P 500, is a price-to-earnings (P/E) ratio adjusted for inflation and cycles. The ratio currently stands at 27.85, which means that for every $1.00 of earnings a company makes, investors are willing to pay $27.85; the last time the ratio was near this level was in late 1999. Comparing the current valuation of the S&P 500 to its historical average of 16.59, the stock market is currently overvalued by 68%. (Source: “Online Data Robert Schiller,” Yale University Department of Economics web site; www.econ.yale.edu/~shiller/data.htm.)
“To see how much optimism is out there fuelling the stock market, investors can look at the Total Asset Rydex Bear Index Fund, which tracks assets in the bearish stock market funds and gives us an idea about what investors are thinking,” Lombardi adds. “As it stands, funds that hold a bearish view on the stock market have the lowest assets since 1998. In other words, optimism is extreme and investors have no fear the stock market will fall.”
Lombardi explains that while history tells us what happened when key stock indices peaked in the past, it also teaches us that it can be impossible to predict a market top. The unprecedented actions of the Federal Reserve (printing so much new money and keeping interest rates artificially low for years) and the government (increasing its debt load by trillions since the Great Recession) have extended the stock market above normal and acceptable historical valuations.
“The market can remain irrational for long periods of time, especially when the Fed is on its side,” Lombardi concludes. “But when the market does come back to reality, and it will, it won’t be a pretty sight for the investors who have bid stock prices higher.”
Founded in 1986, Lombardi Publishing Corporation, which has served over one million customers in 141 countries, is one of the largest consumer information publishers in the world. For more information on Lombardi Publishing Corporation, visit www.LombardiPublishing.com.
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