Expect a "Lost Decade", Stock Market Rout "Only Just a Start"

October has been a terrible month for equities. Yet, this is only a start of what's to come.

Decline Barely Started

Despite the rout, the S&P is just barely down for the year.

Expect a "Lost Decade"

Why?

The Shiller PE Ratio also known as "CAPE", the Cyclically Adjusted Price-Earnings Ratio, is in the stratosphere. It's not a timing mechanism, rather it's a warning mechanism.

The main idea is that earnings are mean reverting.

On that basis, stocks are more overvalued than any time other than the DotCom era.

But that is misleading. In 2000 there were many sectors that were extremely cheap. Energy was a standout buy then. So were retail and financials.

It's difficult to find any undervalued sectors now other than gold.

Financial Crisis Coming

At 1:40 AM (this morning), I posted Eight Reasons a Financial Crisis is Coming.

It's been about 10 years since the last financial crisis. FocusEconomics wants to know if another one is due. The short answer is yes.

Click for details.

Mike "Mish" Shedlock

Comments (29)
No. 1-13
shamrock
shamrock

We're approaching a lost decade in Gold, which crossed 1200 9 years ago. Gold is not under or over valued because it can't be valued by any real metric.

themonosynaptic
themonosynaptic

Since the market bottomed in early-2009 alone there have been corrections of -16.0%, -19.4%, -12.4%, -13.3%, and -10.2% in the S&P 500.

But I'm sure you're right Mish, it is different this time.

themonosynaptic
themonosynaptic

My problem with the Shiller CAPE is the fact that it doesn't include an adjustment for interest rates. If you can get 5% on a 10-year treasury, a 30x valuation from stocks is far too high. But when you only get 2-3% on 10-year treasuries, the equivalent of a 3.3% cash from from the profits of equities (either delivered via dividends, buybacks, or increased valuations) seems like a good place.

I see the issue with stocks not being the high CAPE, but increasing returns on the 10-year bond.

Corto
Corto

Mish, I'd like to hear your opinion on what shamrock said. I follow a slight variant of the permanent portfolio, so I am heavier than most in gold, and it hasn't really worked the way goldbugs have thought it should for quite a long time. It would be disheartening to see stocks, bonds, and gold all drop!

shamrock
shamrock

Regarding the CAPE, that's about to drop from 30 to 26 just based on the cycling out the 2008 $18 earnings with 2018 $140+. 26 is solidly within the norm of the post dot com bubble era.

Sechel
Sechel

thank you . this has been my own thesis for years. based on shiller p/e, gut feel and recalling the 1970's and the depression. i don't believe the public is ready for a lost decade, there will undoubtedly be false bull markets within the downturn that sucker people in. i suggest people read their kindlberger and Mackay

thimk
thimk

it's funny what happens when the price of money becomes dear. also Volcker spills the beans (yes other presidents influenced interest rates ) Stay the course Mr Powell .

Realist
Realist

Expect a lost decade? The sky is falling? Possible, but unlikely. I still expect slow economic growth and modest corporate earnings growth overall

compsult
compsult

This post made front page on marketwatch, oh well at least for 1/2 an hour, now it's gone

mark0f0
mark0f0

It was a lost 4 decades for gold stock owners, with the BGMI/XAU index beneath levels of even 1977. It could easily be a lost 4 decades for the Nasdaq bubble.

Blacklisted
Blacklisted

"At 1:40 AM (this morning), I posted Eight Reasons a Financial Crisis is Coming."

Two days ago I responded why your 8 reasons are symptoms, and not the cause, to which you won't respond.

This current hogwash will also be proven wrong because, simply state, simple models like CAPE (with incomplete data) are always wrong. What may prove to be the lost decade is gold, whose religious-like BELIEVERS where sold the snake oil that gold would necessarily rise because of QE. What these believers (not traders) failed to understand is the world is much bigger than just the USA, and just because the banks got more-than-free-money does not mean there were credit-worthy borrowers or US entities that wanted to borrow (other than to buy back stock). Gold will rise again when confidence collapses, but it will likely take at least a decade to eclipse the 2011 high.

I will answer your THEORY about a lost decade for stocks with a simple question that has gone unanswered - where is the over $80 trillion in global investments going to go when the govt bond bubble officially pops?

Bonus questions 1: what asset class is big enough to absorb the flows and has less risk when the govt bond bubble pops (and actually has collateral)?

Bonus question 2: does the CAPE model, or any other model upon which you rely, comprehend the last time there was a sovereign debt crisis?

El_Tedo
El_Tedo

Predict a crash every month for a decade and eventually you'll be correct.

Jackula
Jackula

Once you hit a half a century on this big stone and seen a few cycles happen its always the same boom and bust cycles. Human psychology. Smart money is selling, all the signs of being at the latter end of the cycle are out there including much of the sentiment in these comments. For those investors here hedge well my friends.