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One Key Measure of Stock Market Valuation is Higher Than Ever

The "forgotten" reason why financial manias repeat

by Bob Stokes
Updated: October 11, 2018

If you're old enough to remember the financial top in the year 2000, at the time stock market valuations had reached such record extremes that charts of internet stocks looked like duplicates of the South Sea Bubble of 1720, or Tulip Mania of the 1630s.

Then came the jarring dot-com crash that wiped out many portfolios.

But just seven short years later, stock market optimism came rip-roaring back to make even higher extremes. The 2007 peak was followed by a far more brutal, across-the-board bear market, the worst since the early 1930s. Surely, you might think, this go-round the public would finally learn that the stock market is risky and stay away for a long time to come.

Nope. Not even "the brink of financial Armageddon" we saw in the fall of 2008 kept them from jumping in again. After a few years, Joe the Investor was back in the markets.

Since then, stocks have hit one record high after another, including several this year. You'd think that, having lived through two boom-and-bust periods in the past 20 years, the investing public would be cautious about today's high stock valuations. But it's not the case.

So, why do investors seem to forget the lessons of the past?

Most people make investment decisions based on the trend in the prevailing sentiment; we call it "social mood." This quote from our Elliott Wave Theorist provided more insight:

Investors have no memory of prior mood extremes. They always forget how they felt at such times, so they are free to feel the same way again and again.

The same applies to real estate: Home prices in many U.S. markets have exceeded their 2006 real estate bubble highs.

Another example of how investors forget the lessons from the past is the return of collaterized debt obligations (CDOs), one of the culprits of the 2008 financial crisis (Bloomberg, Sept. 17):

These days money managers are piling into leveraged loans.... and securities backed by consumer debt rather than mortgages. Even collateralized-debt obligations, blamed by many for triggering the 2008 financial and economic meltdown, are making a comeback.

And, then, there's the stock market.

This chart and commentary are from our October Elliott Wave Financial Forecast:

Overvaluation

The highest stock market valuations in history are generally attributed to the 2000 stock market peak, but by one key measure, the sales of S&P 500 companies, valuations are higher than ever.

Many Wall Street pundits have been expecting a stock market correction. The question is, when is it going to start, and how far might it go?

The stock market's Elliott wave pattern, along with other measures we track, help you answer these questions -- today.


The Next Stock Market "Dip": Minor Correction … or the Start of Something Bigger?

Most investors can only guess.

On the other hand, the Elliott wave model "provides a context for market analysis," as the Wall Street classic book, Elliott Wave Principle notes.

Right now, our Elliott wave experts see a sobering Elliott wave chart pattern unfolding in the main stock indexes.

You can see what they see -- right now.

You can do so by taking advantage of EWI's offer to review our Financial Forecast Service, risk-free for 30 days. Keep reading to get the details …


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