‘It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness …’
– A Tale of Two Cities by Charles Dickens
While all eyes were on Federal Reserve Chair Janet Yellen in Jackson Hole, we were watching something else. In August, the Shiller P/E, a well-regarded metric for measuring the valuation of U. S. equities, breached 27. Given that its normal range is something a bit above 16, valuations are looking rather stretched. Further, the last time the Shiller P/E was above 27 was in October … 2007. And we all know how that movie ended.
While nobody here at GMO is saying that a crash is imminent (and there’s no law that says stocks cannot become even more expensive), we continue to maintain our bias against U. S. stocks. We will also take this end-of-summer moment to point out the yawning disconnect between fundamentals (of the U. S. economy and even corporate America) and their stocks. It really is a tale of two cities, one of mediocre fundamentals versus a meteoric rise in markets (see the chart below).
This post was published at Zero Hedge on Sep 15, 2016.