No one has been able to consistently predict the course of the stock market.
However, one can determine if it is properly valued. At the moment, it is very overvalued. No one would want to purchase an item of clothing that was selling at more than 50 per cent above its true worth.
That today is the situation of the North American stock markets.
The trend in earnings in North America is very sluggish. The result is a ratio of earnings to prices for the S&P at about 18.3 times earnings, four points higher than the five-year average. With earnings not growing very much this is called multiple expansion.
This situation is virtually unprecedented over the last 20 years. Clearly, a repeat of that kind of change in valuation cannot occur again which, given their levels, is the result of low interest rates. Soaring household debt and interest rates must eventually respond by moving up. The market “knows” this, which explains why the stock market is treading water in recent months.
To sustain the market profit, improvements should be forthcoming, but on the contrary. To compound the problem, across the globe there are already signs of a slowdown, with disappointing results in Canada and Europe. That, of course, will entail corporate earnings from not fueling business investment. This will make the stock market vulnerable as earnings are the lifeblood of the market economy.
With Japan as an example, low interest rates which persisted there for 20 years did nothing to boost their economy, so we have that as a reference. Many U.S. and Canadian companies themselves lack investment opportunities so they engage in stock buy-back plans.
Brexit, Britain’s probable departure from the European Union, will hurt confidence worldwide, as will the looming Italian economic situation which will prove to be a keen reminder of the many ramifications and may threaten the entire European economy.
Notwithstanding, the economic recovery in North America was fueled by unprecedented dollops of liquidity that led naturally to gross economic distortions and the highest levels of debt, both individually and governmentally.
People state that they invest in the stock market as there is no alternative. In Europe wealthy people do not participate in the stock market to the extent that North Americans do. The former find other avenues of opportunities such as real estate. To place funds in the stock market at this state is fraught with great risk.
It may persist for some time, but inasmuch as it is so overvalued participants need to proceed with caution of the potential consequences – “a bleak prospect.”
History shows that North Americans alone are so heavily dependent on the stock market investing.
Conversely, of course, is that the stock markets worldwide have been such a minor factor in their economy and do not take the paramount role that our stock markets have with the news media.