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Why The Craziest Bubble In History Might Get Even Bigger

Why The Craziest Bubble In History Might Get Even Bigger

Posted On July 15, 2020 12:04 pm
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The stock market is experiencing the 2nd largest bubble in US market history, and I would argue it’s the craziest one in history.

(Source: Ycharts)

That’s not just because individual stocks like Tesla (TSLA) have gone vertical, trading at

  • 411 times forward earnings
  • 89 times 2022 consensus earnings
  • $316 billion market cap (more than all but 14 companies in America)

Rather, it’s because the S&P 500, is trading at the highest valuations in 19 years.

                              S&P 500 Valuation Profile 

Year EPS Consensus YOY Growth Forward PE Blended PE Overvaluation (Forward PE) Overvaluation (Blended PE)
2020 $124.80 -23% 25.5 22.3 56% 31%
2021 $163.32 30% 19.5 22.5 19% 32%
2022 $187.06 13% 17.0 18.3 4% 7%
12-month forward EPS 12 Month Forward PE Historical Overvaluation PEG 20-Year Average PEG
$142.98 22.3 36% 2.62 2.35

(Sources: Brian Gilmartin, Reuters’/Refinitiv/IBES/Lipper Financial, F.A.S.T Graphs, FactSet Research)

What does this overvaluation mean for future market returns?

                               S&P 500 Total Return Profile

Year Upside Potential By End of That Year Consensus CAGR Return Potential By End of That Year Probability-Weighted Return (CAGR)
2020 -32.2% -55.8% -42.2%
2021 -10.5% -7.3% -5.5%
2022 4.8% 1.9% 1.4%
2025 32.3% 5.2% 3.9%

(Source: F.A.S.T Graphs, FactSet Research)

That future returns are likely to be about 50% less than the market’s historical 7% to 9% CAGR.

The market is literally praying like it’s 1999, yet we are facing an economy like 1929.


(Source: MarketWatch)

Every week 2.4 million new people are filing for unemployment if you include Federal filings. For two weeks total unemployment claims are rising, not falling.

Total unemployment has not been falling, it’s been rising for weeks, and now stands at 32.9 million, the highest absolute number ever recorded.

Actual unemployment today is worse than it was in April.

What’s more, 20% of the pre-pandemic workforce is now out of work and

  • according to the Economic Policy Institute, 11% of lost jobs are gone forever
  • another 10.3 million job losses could be coming through the end of 2021 merely from insufficient fiscal stimulus
  • 22% of small business said in the latest National Federation of Independent Business Federation of Independent Businesses that they will soon start laying off workers
  • companies large and small have begun laying off workers purely for economic reasons, having no direct connection to the pandemic

In a worrisome sign, more than two months after states like Georgia lifted their shelter-in-place orders, layoffs are spreading beyond companies that provide services requiring direct human contact. As disruption from the pandemic lingers, this could mean that the job loss is starting to feed on itself in a classic recessionary spiral, economists said.” – Washington Post

In other words, we are facing the prospect of a Moody’s depression, meaning 12 consecutive months of 10+% unemployment.

If COVID-19 cases continue to surge, the consumers are likely to pull back on spending and they have already started doing in recent weeks.

The US recovery, which started out strong, appears to have run out of steam.


And that data was mostly before the major surge in cases really got underway.

It’s also before the official second wave that’s expected to start in September when schools reopen.

As Moody’s chief economist Mark Zandi noted months ago, a second wave of the virus, even if it doesn’t lead to more lockdowns, could lead to sustained double-digit unemployment, meeting Moody’s definition of a depression.

If we get a second wave, it will be a depression,” the firm’s chief economist told CNBC’s “Trading Nation” on Friday. “We may not shut down again, but certainly it will scare people and spook people and weigh on the economy.” – CNBC

We’re not likely facing a decade long Great Depression, but it does mean the 2nd most overvalued stock market in history is the most disconnected from economic fundamentals in history.

None of this means that the economy is destined to repeat its sickening March plunge. But many economists expect what Rubeela Farooqi of High-Frequency Economics calls a “stop-and-go recovery” that will advance or retreat depending upon public health…

I don’t think any of us think we’ll get the economy back to 100 percent before there’s a medical answer,” said James Glassman, JPMorgan Chase’s head economist for commercial banking. “The longer it goes on, the more damage it does.” – Washington Post (emphasis added)

Medical experts and economists now agree, there is very little chance the economy can fully recover until the pandemic ends. That’s not likely until 2022.

We’re likely in the bottom of the 2nd inning of the ball game, yet stocks are acting as if we’ve already won the world series.

But just because the worst economic fundamentals since the 1930s means that stocks SHOULD fall soon, doesn’t mean they will.

Why The Craziest Bubble In History Might Get Even Bigger

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About author

Dividend Sensei
Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I'm a proud co-founder of Wide Moat Research, Dividend Kings, and the Intelligent Dividend Investor. My work can be found on Seeking Alpha, Dividend Kings, iREIT, and the Intelligent Dividend Investor. My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives. With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams and achieving long-term financial goals.

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