A bear market could hit U.S. stocks any time now By Mark Hulbert | August 15, 2017
Overvalued, no matter how you measure prices
Expect some incredible fireworks when this incredible bull market finally comes to an end.
That’s because the stock market is overvalued according to almost any standard valuation measure, and it’s at such times that, to use the famous phrase from hedge fund manager Doug Kass, risk happens fast.
Consider how quickly some stocks dropped from their highs at the top of the internet bubble in March 2000 — one of the few times in U.S. history when the stock market was just as overvalued as today. It took just three trading sessions back then for the Nasdaq Composite Index COMP, +0.15% to drop 10% from its all-time high — satisfying in a blink of an eye the semi-official criterion of a market correction. And it took just 17 sessions for the Nasdaq to drop enough — a 20% decline — to become a major bear market.
Note carefully that there was no obvious external event that triggered these huge drops. That’s worth remembering, given the recent obsession about a possible geopolitical crisis involving North Korea. Many investors are mistakenly assuming, now that such a crisis appears less likely, that happy days are here again — fueling a 135-point rise in the Dow Jones Industrial Average DJIA, +0.13% on Monday.
We all need to remember that when the stock market is hugely overvalued, as it is today, a major bear market can begin for seemingly no external reason.
How overvalued is the stock market? The chart below paints the depressing picture: According to six widely-used valuation measures, the market currently is more overvalued than it was at between 86% and 100% of the three dozen bull market tops since 1900. (I relied on a bull market calendar maintained by Ned Davis Research for a precise list of those market tops.)
To be sure, the U.S. market by most measures was more overvalued at the top of the internet bubble than it is today. But not according to all of them. The S&P’s 500’s SPX, +0.07% price-to-sales ratio currently is just as high, if not slightly higher, than where it stood in March 2000. (Precision is difficult, since only quarterly data are available for S&P 500 sales per share, and even then with a lag.)
None of this means that a bear market will begin immediately, of course. The stock market can remain overvalued for a long time, and become more overvalued.
Don’t conclude from this, however, that valuation doesn’t matter. When stocks are as overvalued as they are today, almost anything can become a bear market trigger. And sometimes it takes nothing at all.
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