The markets are very reminiscent of 2007-08, as one day they crash and the next day have a huge rally. Volatility is back and the theme of the day. Again, our signals for long-term investors have not triggered a sell signal but are very close on the Canadian side.  Our models show that the market can be peaking here and starting a major correction. It is also possible if the markets do not break through major support levels, that the market has a final rally to mid to late 2018 before a much larger correction. We will advise our clients as the market shows its hand.

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Here is one indicator that we talked about which shows how expensive this market is today:












Yes, there are a great deal of numbers in the chart, but let’s try to simplify it for you:

  1. First two columns show the month and year the market peaked as well as when the crash ended
  2. The 3rd and 4th columns show what the index was (inflation adjusted which you have to do or the crashes do not show real data based on today’s standard) show the index level the S&P500 peaked at and the level where it found a bottom after the crash
  3. The 5th column shows the total loss during the crash which ranged from 22 to 81%. The most recent two have been close to 50% each
  4. The 6th column shows the price-earnings (PE) multiple at the peak of the market. They tended to range from a low of 9.19 to a high of 27.97 in 2000
  5. The second last column shows the current PE multiple relative to levels at previous peaks. All of them were lower other than 2000, which was only 4% higher than today. Today’s level of 26.71 is higher than all the others from 8% to 191%
  6. I also added an interest rate level for the period, as the stock market tends to trade up to high PE levels with low-interest rates and vice versa. The interest rate for the 3-month T-bill today’s 1.41%, so the areas highlighted in blue are similar interest rates to today, most of them lower. As you can see, all those periods still saw much lower PE levels at market peak.

The message here is simple…based on historical data for trailing 12-month price-earnings multiple, today’s market is extremely expensive. Again, the only time since the 1920’ss that the market had a higher PE level at the market peak was in 2000, which we are very close to today.

You may hear future PE levels based on analyst expectations, but the reality is, they are wrong many times and are always on the positive side. I believe the only true way to assess price-earnings multiples is via actual trailing 12-month PE levels.

I also like to look at Shiller CAPE 10-year average as it eliminates short-term fluctuations. But the data showed you where markets have historically peaked. We are well below nearly all those levels significantly.

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Matt Sammut