A ‘Stealth’ Bear Market Has Already Begun

An Expensive Market
PARIS – Yesterday, we reported that the U. S. manufacturing sector shrank for the fifth month in a row in December. We could have added that it is now back to levels last seen in July 2009 – in the immediate aftermath of the global financial crisis.
We could have mentioned, too, that the Baltic Dry Index – which tracks the cost of shipping raw materials by sea – just hit a record low. We’ve been citing many other fundamental indicators all pointing the same way – toward a weakening global economy.
Why, then, are stocks – which are supposed to look ahead – still telling us that the coast is clear?
The Dow fell about 2% last year. And the S&P 500 fell by just under 1%. Neither was enough to cause alarm. And after a rough start on Monday, the mainstream press reports that prices ‘stabilized’ yesterday.
But according to Nobel prize-winning economist Robert Shiller, U. S. stocks have almost never been so expensive. His cyclically adjusted price-earnings ratio – or CAPE ratio – looks at the relationship between share prices and the average inflation-adjusted earnings from the previous 10 years.
This controls for – or ‘smoothes’ – year-to-year swings in corporate earnings, which can be highly volatile. As a result, Shiller says, it gives a more accurate picture of what kind of value is on offer.

This post was published at Acting-Man on January 7, 2016.