{"id":9515,"date":"2019-11-18T13:47:53","date_gmt":"2019-11-18T13:47:53","guid":{"rendered":"https:\/\/fundamentalis.com\/?p=9515"},"modified":"2019-11-23T00:33:43","modified_gmt":"2019-11-23T00:33:43","slug":"sp-500-valuation-and-the-potential-for-a-correction","status":"publish","type":"post","link":"https:\/\/fundamentalis.com\/?p=9515","title":{"rendered":"SP 500 Valuation and the Potential for a Correction"},"content":{"rendered":"
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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”.<\/p>\n

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…)<\/p>\n

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Tracking the SP 500 valuation page chronologically provides some perspective on the valuation changes over shorter periods of time.<\/p>\n

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

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.<\/p>\n

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.<\/p>\n

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So what’s the odds of an SP 500 correction at present ?\u00a0<\/strong><\/em><\/p>\n

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<\/a>.<\/p>\n

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click to enhance \/ open \/ enlarge<\/figcaption><\/figure>\n

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On the flip side, Samantha LaDuc (@SamanthaLaDuc) posted this as part of her blog this weekend:<\/p>\n

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click to open \/ enhance \/ enlarge<\/figcaption><\/figure>\n

and from Samantha’s Wednesday, November 13th, 2019 blog post:<\/p>\n

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Click to enhance \/ open \/ large<\/figcaption><\/figure>\n

Summary \/ conclusion:\u00a0<\/strong><\/em><\/p>\n

In\u00a0 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.<\/p>\n

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

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.<\/p>\n

Remember this is just an opinion. Draw your own conclusions and understand your own emotional makeup.<\/p>\n

Thanks for reading,<\/p>\n

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