The S&P 500 Index is now 66% above its 2007 pre-crisis peak and 250% above the low it reached in 2009. The market’s cyclically adjusted price-to-earnings ratio is 31.3 times. That ratio has been higher only twice: in 1929 and in 1999. Both earlier peaks were followed by violent crashes. So, is now the time to sell?
The latest Macro Watch video looks for answers by analyzing the Household Sector Balance sheet from the Fed’s Financial Accounts Of The United States. We find that Household Net Worth has spiked by 70% - by $40 trillion – since the end of 2008.
The ratio of Household Net Worth to Disposable Personal Income has never been higher than it is today.
Further analysis shows that Real Estate values are stretched, but only modestly when compared with Stock prices, which have clearly moved into bubble territory. But do elevated valuations mean it is time to sell? The answer to that question is not straightforward.
I have seen cheap markets suddenly crash for reasons that were entirely unpredictable (Hong Kong in 1987, for example). And I’ve seen bubbles inflate to wildly irrational levels (Japan in the late 1980s, Thailand in the mid-1990s and Nasdaq in 1999).
So, should investors play it safe and sell now to lock in their profits? Or should they stay in the market and see how far this bubble inflates? After all, the final months of the boom often deliver a very sharp surge in prices.
In this video, I share what I’ve learned from the bubbles I lived through over the last three decades. I also discuss the one factor that I believe will determine whether the market crashes or continues to surge ahead.
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