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We Are Headed for a Stock Market Crash in one scary chart

Sep 12, 2018 | Kevin Troy |

We Are Headed for a Stock Market Crash in one scary chart

Since the stock market crash in 2000, we have witnessed a lot of changes in the business and financial worlds. Apple Inc. has become the world’s most valuable company, Amazon has become the market leader in online retailing, and Elon Musk has become a successful car manufacturer.

However, as Doug Ramsey, chief investment officer at Leuthold Group, points out, certain things never change. He is highlighting the numerous parallels between 2000 and 2018, one of which is the elevated valuation of the S&P 500. Ramsey illustrates this in a chart he calls the “scariest chart in our database.”

“Recall that the initial visit to present levels was followed by the S&P 500’s first-ever negative total return decade,” Ramsey noted in a recent blog post. The most popular measure of a stock’s value is the price-to-earnings ratio. A less used measure is the price-to-sales ratio, which experts say is less susceptible to manipulation because it’s based on revenue.

Ramsay goes on to share another frightening chart that shows the median price-to-sales ratio. Here, the S&P 500 is twice as expensive as in 2000.

Ramsey says that “[o]vervaluation in 2000 was highly concentrated; today it is pervasive, with the median S&P 500 price/sales ratio of 2.63 times[, which is] more than double the 1.23 times prevailing in February 2000.”

He goes on to explain how 2018 is starting to look more and more like 2000:

“The statistical similarities between the two bulls are on the rise, and the wonderment surrounding the disruptive technology of today’s market leaders seems to have swelled to maybe 1998-ish levels.”

According to Ramsey, such an upward trajectory of the market is unsustainable. While history may not be the best guide for the future, he says, the performance of the S&P 500 after it peaked on January 26 is almost an exact match to what took place almost two decades ago.

“In the earlier case, a volatile five-month upswing that began in mid-April ultimately fell just a half percent short of the March 24 high by early September. This year, a similarly choppy six-month rebound has taken the S&P 500 to within 1% of its January 26 high,” Ramsey writes.

Other similarities include healthy breadth as shown by the uptrend in the daily NYSE Advance/Decline Line while corporate profits, measured using Leuthold’s internal earnings indicator, are very solid according to Ramsey.

However, we don’t have to look to just these indicators to evaluate the state of today’s stock market. The ongoing trade clash between the US and its trading partners not only threatens the stock market but could—worst-case scenario—derail global trade.

If the Trump White House, as planned, imposes 25% tariffs on $16 billion in Chinese imports, China is expected to impose tariffs on $60 billion of US goods.

We are headed towards the longest bull market in history, which will happen on August 22. The previous record is the one that ended with the tech bubble burst of 2000.