A quick lesson on market tops

The below chart comes to us from JPMorgan Asset Management’s Q3 Guide to the Markets slide presentation…

inflection points

A few things should jump out at you…

First, this stock market recovery has now just about lapped the one that followed the 2000-2002 recession, 190% vs 101%.

Second, although we are currently selling at the same PE ratio as we were at the market’s top in 2007, there is one very important difference – we’re at about half the yield on the 10-year treasury versus back then. In 2007, virtually all economic growth was coming from private sector leverage, specifically in the real estate market. Today, lots of growth is also coming from leverage – but it’s mostly the Fed printing to buy bonds from the Treasury and then letting them mature and roll off. This is funding deficit spending and preventing a lot of really tough budgetary battles in Congress.

This is powering a slowly-growing economy and a record amount of buyback activity which is helping to fuel corporate prosperity, which in turn, theoretically, is creating private sector jobs.

The whole mutually beneficial system I’m describing is what Jeff Gundlach has called a “circular financing scheme”. He says that if it works, it’s the most important invention since the telegraph.

One more thing – we’re nowhere near the PE ratio the S&P 500 printed at the height of the dot com boom. I would also remind you that – forget the S&P – at the top of the market in 2000 it was really the Nasdaq that was the focal point for stock investors, and that motherf*cker was trading at 96 times earnings. Even uber-perma-bull Jeremy Siegel shouted from the rooftops in March of 2000 that the large cap tech stocks of the Nasdaq were a “sucker bet” to be long.

So what can we learn from looking at these inflection points? Well, you can remind the next bubble-screamer you come across of the following three takeaways:

a) US stocks are nowhere near as overvalued now on an absolute basis as they were in 2000.

b) US stocks are nowhere near as overvalued now on a relative basis (think bond yields) as they were in 2007. Plus, we’re actually getting more in today’s dividend yield versus back then.

c) during the prior two tops, stocks got cut in half from both absurd valuation levels (2000) and from reasonable valuation levels (2007) – so valuation levels alone are not ever going to be your tell.

End of lesson.

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web
  1. Marc commented on Dec 01

    .

    ñïñ!

  2. Oliver commented on Dec 12

    .

    ñïàñèáî çà èíôó!

  3. wendell commented on Feb 04

    .

    thanks for information.

  4. Blue Coaster33 commented on Apr 27

    The Silent Shard

    This could likely be very practical for some of your work opportunities I intend to really don’t only with my blog but

  5. free movie downloads commented on Apr 28

    Third Flower

    My wife and i have already been now delighted that Albert could perform his scientific tests on account of the tips he had by means of your online page. It is actually every now and then perplexing to just normally be freely giving methods which many p…

  6. free movie downloads commented on Apr 28

    Thorn of Girl

    Superb information and facts may be located on this web website.

  7. w88 commented on Sep 20

    … [Trackback]

    […] Read More to that Topic: thereformedbroker.com/2014/07/17/a-quick-lesson-on-market-tops/ […]

  8. bitcoin trading software commented on Sep 22

    … [Trackback]

    […] Here you will find 64705 additional Information on that Topic: thereformedbroker.com/2014/07/17/a-quick-lesson-on-market-tops/ […]

  9. Immediate Edge Review 2020 commented on Sep 23

    … [Trackback]

    […] There you can find 34196 more Info to that Topic: thereformedbroker.com/2014/07/17/a-quick-lesson-on-market-tops/ […]

  10. sweet shop online commented on Sep 29

    … [Trackback]

    […] Find More Info here to that Topic: thereformedbroker.com/2014/07/17/a-quick-lesson-on-market-tops/ […]

  11. cuanto sale 1 bitcoin en dolares commented on Sep 30

    … [Trackback]

    […] Find More on that Topic: thereformedbroker.com/2014/07/17/a-quick-lesson-on-market-tops/ […]

  12. bitcoin evolution commented on Oct 01

    … [Trackback]

    […] Find More on that Topic: thereformedbroker.com/2014/07/17/a-quick-lesson-on-market-tops/ […]