Stock Market Bull Ends At Emotional Extreme Not Overvaluation

Monday, February 23, 2015

By all accounts this stock market bull has confounded the experts!

The S&P 500 has risen 233% since the March 5th 2009 lows. In a months’ time, barring any unforeseen crisis, that would make this bull market 6 years old. Long by historic standards.

And then there is valuation…

By almost every orthodox measure the market is overvalued. Price to Sales ratio is at an all-time high, Shiller’s P/E ratio, price to book value, market cap to GDP and price to cash flow all reflect a richly valued market. NYSE margin debt at December 2014 is at a record $456 billion

How about this?

Even though analysts continue to revise S&P500 12-month earnings estimates lower, NBER has still not defined this as a recession – a unique situation which has not occurred before.

S&P 500 stock market bull vs Forward EPS Estimate

Juxtapose this “orthodoxy” with the psychological view:

  • A market making new highs on low volume – a sign that retail investors are absent.
  • A market surrounded by general bearish or at least cautious chatter – at least that’s what my Twitter feed sounds like!
  • Elevated cash holdings, despite cash paying no yield, seen as prudent and cautious.

In other words there remains a lot of money on the sidelines staring anxiously at rising prices.

Quintessentially this is the WALL OF WORRY which all bull markets must climb.

We have begun fielding more calls for higher equity exposure … a sign that fear is subsiding and remorse over ‘missed’ returns is rising. This trend is a mere trickle and will need to become a flood before the bull market breathes its last.

We continue to favor growth equities and technology in particular. There is a technology revolution going on yet persistent market volatility, heightened investor risk aversion, and elevated stock correlations have contributed to prices lagging their actual earnings growth rates.

We have been in a growth cycle since 2007/08 and the tech heavy Russell 1000 growth index has recently started to outperform (again) versus the S&P 500.

Russell 1000 Growth Index vs S&P 500 (if chart moving higher Russell 1000 growth is outperforming the S&P 500)

Figure 1 – Russell 1000 Growth Index vs S&P 500 (if chart moving higher Russell 1000 growth is outperforming the S&P 500)

In the outright hunger for yield we believe retail investors have bypassed the real growth story and when they awake to it the price moves will be breathtaking.

— Greg
Greg Silberman CFA®, CAIA, CA(SA)

Chief Investment Officer

Advisory Services offered through Atlanta Capital Group.

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