Jeremy Grantham Warns of a 17% Plunge in the S&P 500 This Year
The popping of the bubble in US stocks is far from over and investors shouldn’t get too excited about a strong start to the year for the market, warns Jeremy Grantham, the co-founder and long-term investment strategist of GMO.
Market Cap to GDP: Buffett Valuation Indicator
With the Q3 GDP Third Estimate and the December close data, we now have an updated look at the popular "Buffett Indicator" -- the ratio of corporate equities to GDP. The current reading is 146.7%, down from 156.2% the previous quarter.
The Latest Look at the Total Return Roller Coaster
Here's an interesting set of charts that will especially resonate with those of us who follow economic and market cycles. Imagine that five years ago you invested $10,000 in the S&P 500. How much would it be worth today, with dividends reinvested but adjusted for inflation? The purchasing power of your investment has increased to $13,364 for an annualized real return of 5.8%.
December 2022: Market Valuation, Inflation and Treasury Yields
Our monthly market valuation updates have long had the same conclusion: US stock indexes are significantly overvalued, which suggests cautious expectations on investment returns. On August 4, 2020, the 10-year Treasury yield hit its all-time low of 0.52%. As of December 30, 2022, it was at 3.88%.
Is the Market Still Overvalued?
Here is a summary of the four market valuation indicators we update on a monthly basis.
- The Crestmont Research P/E Ratio
- The cyclical P/E ratio using the trailing 10-year earnings as the divisor
- The Q Ratio, which is the total price of the market divided by its replacement cost
- The relationship of the S&P Composite price to a regression trendline
Regression to Trend: 115% Above Trend in December
Quick take: At the end of December the inflation-adjusted S&P 500 index price was 115% above its long-term trend, unchanged from the previous month.
About the only certainty in the stock market is that, over the long haul, over performance turns into underperformance and vice versa. Is there a pattern to this movement? Let's apply some simple regression analysis to the question.
Moving Averages: S&P Down 5.9% in December, Down 19.4% in 2022
Valid until the market close on January 31, 2023.
The S&P 500 closed December with a monthly loss of 5.9% after a gain of 5.4% in November. At this point, after close on the last day of the month, four of five S&P 500 strategies are signaling "cash" — iShares Barclays 7-10 Year Treasury (IEF), Vanguard REIT Index ETF (VNQ), Vanguard Total Stock Market ETF (VTI), and Invesco DB Commodity Index Tracking (DBC) — down from from last month's quintuple "cash" signal.