{"id":9724,"date":"2021-07-19T06:14:00","date_gmt":"2021-07-19T06:14:00","guid":{"rendered":"https:\/\/zackspcg.com\/blog\/?p=9724"},"modified":"2022-02-26T13:05:37","modified_gmt":"2022-02-26T13:05:37","slug":"do-high-valuations-signal-a-bear-market-ahead","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/do-high-valuations-signal-a-bear-market-ahead\/","title":{"rendered":"Do High Valuations Signal a Bear Market Ahead?"},"content":{"rendered":"\n<p>The 2000 tech bubble may be responsible for a myth in stock\nmarket investing. Here\u2019s the myth: <em>high valuations (P\/E ratios) give way to long\nand steep bear markets<\/em>. It seems like a logical idea and takeaway, but\nhistory doesn\u2019t support it.&nbsp; <\/p>\n\n\n\n<p>When the market crashed in 2000, many dot coms were trading\nat outrageous P\/E ratios, and the S&amp;P 500 was expensive \u2013 trading at a 25.2x\nforward P\/E. Every reader remembers the bear market that followed. <\/p>\n\n\n\n<p>In recent years especially, I see quite a few comparisons of\nthe current market\u2019s valuation to its valuation in the late 1990s, and some\nprognosticators seem to imply that the higher the stock market\u2019s valuation\ngoes, the closer we may be to a big and long bear market. But examining history\nshows that high valuations do not necessarily lead to high magnitude and long\nduration bear markets. In fact, the opposite is true.<sup>1<\/sup><\/p>\n\n\n\n<p>____________________________________________________________________________<\/p>\n\n\n\n<p><strong><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2021_07_19&amp;content=stock_market_outlook_report   \">Navigating Through a Potential Bear Market? Download Our Stock Market Outlook Report!<\/a><\/strong><\/p>\n\n\n\n<p>Even if we enter a big and long bear market, the key is to\nprepare your investments for the long term. Don\u2019t let fear and emotions urge\nyou to time the market and make short-term decisions. Instead, we recommend looking into key economic\nindicators that can make a positive impact on your financial success.<\/p>\n\n\n\n<p>To help\nyou do this, I am offering all readers our just-released Stock Market Outlook\nreport. This report contains some of our key forecasts to consider such as: <\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><em>Zacks\nrank S&amp;P 500 sector picks<\/em><\/li><li><em>Zacks\nview on equity markets<\/em><\/li><li><em>What\nproduces 2021 optimism?<\/em><\/li><li><em>An\nupdate on the outlook for Covid-19<\/em><\/li><li><em>Top\nstocks in top industries<\/em><\/li><li><em>Sell-side\nand buy-side consensus<\/em><\/li><li><em>And\nmuch more<\/em><\/li><\/ul>\n\n\n\n<p>If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!&nbsp;<br> <strong><br><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2021_07_19&amp;content=stock_market_outlook_report   \">IT\u2019S FREE.&nbsp;Download the Just-Released August 2021 Stock Market Outlook<\/a><sup><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2021_07_19&amp;content=stock_market_outlook_report   \">2<\/a><\/sup><\/strong><\/p>\n\n\n\n<p>____________________________________________________________________________<\/p>\n\n\n\n<p>In a recent study that looked at all bear markets since\n1900, it was found that there is little correlation between CAPE (cyclically\nadjusted P\/E) ratios and the size\/scope of bear markets. Some of the biggest\nbear markets in history started when CAPE ratios were relatively low, and some\nof the smallest and shortest bear markets started when valuations were\nelevated. For all the bear markets examined from 1900 onward, more than 50% of\nthem were longer when their valuations were <em>lower than the long-term average<\/em>\nP\/E at the outset.<\/p>\n\n\n\n<p>One specific example was the fierce bear market that went\nfrom September 1939 to April 1942. The U.S. economy was battered from the\nDepression, and World War II was an existential threat to the nation. But when\nthe bear market started, stocks were largely undervalued \u2013 the CAPE ratio was\nsitting at 16.45. Many factors triggered the bear market, but expensive stocks\nweren\u2019t one of them. <\/p>\n\n\n\n<p>Investors are constantly searching for ways to \u2018value\u2019 the\nmarket. Valuations help us determine when stocks are cheap and therefore\nattractive, or when they\u2019re expensive and should be avoided. But valuations\nalone should not direct an investment strategy. There are too many other\nfactors to consider: interest rates, inflation, earnings growth, geopolitical\nforces, technological innovation, and so on down the line. <\/p>\n\n\n\n<p>Looking at valuations in a vacuum will not give an investor\nthe full picture of the economy and stock market, in my view. I have also\nwritten before about a weakness I see in the CAPE ratio as a valuation tool.\nInvestors should note that the CAPE ratio uses decade-old earnings data, which\nis great for historical comparisons but tells us virtually nothing about what\nlies ahead (which is exactly what we need to know to inform investment\ndecisions). <\/p>\n\n\n\n<p>Factors like cheap energy, falling commodities prices,\nproductivity gains, currency fluctuations, and new technology (to name just a\nfew) can contribute significantly \u2013 or conversely weigh down \u2013 a company\u2019s\nfuture earnings. A stock\u2019s price today is greatly influenced by what investors\nare <em>willing to pay for<\/em> <em>expected earnings<\/em>, meaning that\nsentiment and growth forecasts play key roles. The CAPE ratio doesn\u2019t account\nfor either. If they did, and you relied on the CAPE metric as a proxy for when\nto invest in the last twenty years, you may have never owned equities! For a\nlong-term growth investor, that would have been a mistake.<\/p>\n\n\n\n<p><strong>Bottom Line for\nInvestors<\/strong><\/p>\n\n\n\n<p>If today we saw a confluence of negative economic data\nalongside a high and rising CAPE ratio or other valuation measures, then we\u2019d\nprobably have something to fear. But I don\u2019t see this.<\/p>\n\n\n\n<p>The forward P\/E on the S&amp;P 500 is currently around 21x,\nwhich is probably lower than most investors would have guessed and should be\nlooked at relative to longer duration U.S. Treasury bond yields (which remain\nlow historically). We also have S&amp;P 500 companies turning in record\nearnings and raising estimates for future quarters \u2013 S&amp;P 500 earnings per\nshare (EPS) estimates for 2021 have jumped from $167 at the beginning of the\nyear to $191 six months later. <\/p>\n\n\n\n<p>In my estimation, the global economy is set for more\nexpansion ahead, not the opposite. And I believe stock prices should do what\nthey\u2019ve almost always done ahead of further economic expansion &#8211; go up. And\nthat\u2019s even if the P\/E of the market is above 20x.<\/p>\n\n\n\n<p>Whether\nstock prices rise or decline, we still recommend that investors stay prepared\nfor any given situation. In such early stages of recovery, one way to stay\nprepared is to stay focused on the facts and key data points that can\npositively impact your long-term investments. <\/p>\n\n\n\n<p>To help you do this, I am offering all readers our <strong><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2021_07_19&amp;content=stock_market_outlook_report   \">just-released August Stock Market Outlook Report<\/a>. <\/strong>This report contains some of our key forecasts to consider such as: <\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><em>Zacks\nrank S&amp;P 500 sector picks<\/em><\/li><li><em>Zacks\nview on equity markets<\/em><\/li><li><em>What\nproduces 2021 optimism?<\/em><\/li><li><em>An\nupdate on the outlook for Covid-19Top stocks in top industries<\/em><\/li><li><em>Sell-side\nand buy-side consensus<\/em><\/li><li><em>And\nmuch more<\/em><\/li><\/ul>\n\n\n\n<p>If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!<br><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Investors and pundits who claim that high P\/E ratios inevitably lead to long bear markets are ignoring other key factors<\/p>\n","protected":false},"author":3,"featured_media":8874,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[63,71],"tags":[],"class_list":["post-9724","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitch-on-the-markets","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9724","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=9724"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9724\/revisions"}],"predecessor-version":[{"id":10353,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9724\/revisions\/10353"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=9724"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=9724"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=9724"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}