This is a syndicated repost courtesy of Confounded Interest – Online Course Notes for Financial Markets. To view original, click here. Reposted with permission.
Yes, the stock market is on a roll with the Dow recently piercing the 26,000 mark. And the S&P500 index has pierced the 2,800 mark. Of course, the massive Federal Reserve intervention (along with other global central banks) has certainly thrown gas on the fire.
Looking at price levels alone is not meaningful. So, let’s look at two stock market adjusted indices.
First, there is the S&P Peak PEG ratio. It is a price to peak-earnings multiple, adjusted for long-run trend growth. It is at the all-time high.
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Second, we have Bob Shiller’s CAPE (Cyclically Adjusted Price-Earnings) ratio that is now at the second highest peak (after the Dot,com bubble) and above the notorious Black Tuesday of 1929.
But it is not just the stock market that may be overheated. How about home prices … again?
And if we adjust home price growth by hourly earnings by the majority of the population, we see that home prices YoY are growing 3 times faster than hourly earnings YoY.
This might help explain why The Fed is so timid about unwinding its balance sheet.
Did someone mention fear?
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