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.