Almost everyone who invests knows that stocks are at elevated levels relative to underlying economic momentum in developed economies.
They’ve been turbo-charged by three rounds of quantitative easing by the fed in the US, by continuous quantitative easing in Japan, and more recently the ECB has embarked upon a similar program.
By taking rates to zero and then dropping money on the market central banks have allowed stocks to soar well beyond the limits of “fundamental” stocks valuations as prices have either risen to new all-time highs or held firm at relatively high levels for months.
That’s driven a growing chorus of “we’ll all be ruined” predictions.
Our own Henry Blodget channeled Roger Babson, who called the Stock Market Crash of 1929, in a piece yesterday saying “A crash is coming, and it may be terrific.”
But perhaps the best evidence that eventually all good things must come to an end stems from research released today by GaveCal Capital analyst Bryce Coward on the company’s blog.
After last week trying hard to find “value” in the market, Coward has taken a slightly different tack this week. He has prepared a number of charts which show the absolute level of valuations for the median stock in developed emerging markets as measured by the MSCI World Index.
Here are his general observations:
- The median DM stock is more expensive than the median EM stock by each valuation metric
- DM valuations are in the range of the prior valuation peaks seen in 2007 and 2000
- EM stocks (for which we have less history) are still somewhat below their 2007 peak, but are nonetheless well above their 2009 lows.
Here are the charts. But remember, markets can stay irrational for longer than most investors can stay solvent.