A Symbol of Death for Stocks

We’re spoiled for material.  Each and every day we check the headlines with glee.  Not only are we eager to see what’s happening…we’re eager to discover the latest canard.

For instance, last fall something called Balloon Dog sold at a Christie’s auction for $58.4 million.  Balloon Dog, if you’ve never heard of it, is a stainless steel art project designed to look like a gigantic twisty balloon dog.  How cool is that?  And there’s meaning behind it too…

“I’ve always enjoyed balloon animals because their like us,” articulated artist and Balloon Dog creator Jeff Koons.  “We’re balloons.  You take a breath and you inhale, it’s an optimism.  You exhale, and it’s kind of a symbol of death.”

No doubt, the mania for art is inhaling with optimism.  Earlier this week, Christie’s held another auction.  Apparently, $745 million worth of paintings and sculptures were sold off…the highest total for a single Christie’s auction, not accounting for inflation.  More importantly, and demonstrating the gigantic global wealth transfer from west to east over the last decade, half the buying was done by Xin Li, deputy chairman of Christie’s Asia.

Of course, after the giant art fad inhalation…there’s the exhalation.  This is what Koons calls a symbol of death.  Naturally, we watch with great anticipation…

The Worst Investment

As for the stock market, it also appears to be in the later stages of a massive inhalation.  On Tuesday, for instance, the S&P 500 and the DOW both hit new highs.  The S&P 500 even eclipsed 1,900 before settling at 1,897.

These sorts of mile markers don’t generally mean much, if anything.  Perhaps 1,900 is just a mile marker guiding the way to 2,000.  Perhaps it is the marking of a top.  Even with the big slip on Wednesday and Thursday we really don’t know.

Nonetheless, we have an inkling it is a marker that should be greeted with caution.  Like a $58.4 million stainless steel twisty balloon dog, the S&P 500 at 1,900 is more likely a gross measurement of the collective delusions of mankind than a reflection of calm, deliberate consideration.  Here’s what we mean…

The S&P 500 is trading at 18.85 times trailing twelve month earnings.  At the same time, earnings per share are at an all-time high.  Thus corporate earnings must either rise further or share prices must fall to bring stock valuations back into whack.

On top of that, the current dividend yield on the S&P 500 is just 1.92 percent.  So even if share prices stay the same, it’ll take an entire working life – roughly 40 years – for an investor to get their money back.  With the exception of a $58.4 million Balloon Dog, could there possibly be a worse investment?

A Symbol of Death for Stocks

You never know.  We can recall several episodes over the last 15 years where stocks were overvalued yet they continued to go up.  Regrettably, high valuations ultimately resulted in an abrupt and destructive loss of wealth for late buyers.

“It’s tough to make predictions, especially about the future,” said Yogi Berra.  We think Yogi was on to something here.  However, where markets are concerned, there are some rough metrics that can be used for guidance.

Certainly these metrics won’t allow you to time the market in a precise manner.  Nor will they allow you to not miss out on potential gains.  Conversely, they will allow you to practice humility…especially when you’re sitting in cash as the market continues to rocket upward.

In short, stock markets valued above their historical average will eventually revert down to – or even below – their mean.  Similarly, stock markets valued below their historical average will eventually revert up to – or even past – their mean.

The S&P 500 is well above its mean.  Prospects for near term earnings growth are bleak.  The current bull market is into its 5th year.

From what we gather, over the last 100 years the average bull market has lasted 755 days and provided an 85 percent gain.  The current bull market is going on somewhere around 1,885 days with a gain of over 180 percent.  That’s more than double the average.

What we mean is, the stock market is like a balloon animal.  After the inhalation cometh the exhalation – Koons’ symbol of death.  It’s long overdue, indeed.

Sincerely,

MN Gordon
for Economic Prism

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