SP 500 Valuation and the Potential for a Correction

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Each quarter Dr. David Kelly, the Chief Global Strategist for JP Morgan and his team, publish the “Guide to the Market” (GTTM) which is 70 – 75 pages chock full of some of the best capital market, economic and Federal Reserve data you can find in one place. Dr. Kelly holds a conference call the first day or two of each quarter and runs through what he thinks is important in “the Guide”.

This graph / chart / table has always caught my eye since it provides great longer-term perspective on the SP 500’s valuation. (See first chart above…)


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Tracking the SP 500 valuation page chronologically provides some perspective on the valuation changes over shorter periods of time.

The fact is the data hasn’t really varied much over the last 2 – 3 years. The EY – BAA yield spread looks undervalued,

The GGTM is one of the few places investors can get the SP 500 “cash-flow valuation” and if you track it on the spreadsheet, it shows the SP 500 a little overvalued relative to historical ranges, but certainly not alarmingly so. I’d love to see that metric as of March, 2000.

By the way, the GGTM was published on 9/30/19, and at that time the SP 500 closed the quarter at 2,976.74, while the Nasdaq closed the quarter at 7,999.34.


So what’s the odds of an SP 500 correction at present ? 

Bespoke thinks that the SP 500 is about 6% overvalued, and suggests a 9% – 10% return for the SP 500 over the next year, about where a forecaster said it might be in last week’s blog post.

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On the flip side, Samantha LaDuc (@SamanthaLaDuc) posted this as part of her blog this weekend:

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and from Samantha’s Wednesday, November 13th, 2019 blog post:

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Summary / conclusion: 

In  a year where the SP 500 will likely finish up 25% or so, a 6% correction (the amount Bespoke thinks the SP 500 is overvalued), or a market flush like Samantha LaDuc is looking for might be just what the doctor ordered in terms of flushing out the latest surge in bullish sentiment.

It’s still a long way from the type of secular bear market we saw in 2001 – 2002 and then again in 2008.

One of the interesting aspects to me the last few years is how quickly sentiment changes: I can practically guarantee you that if we get a 3% correction in the SP 500, sentiment will turn south quickly and within a few weeks, bears will be near highs again. It’s happened numerous times since 2008.

Remember this is just an opinion. Draw your own conclusions and understand your own emotional makeup.

Thanks for reading,










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