Sunday, September 30, 2012

above GDP

It is a great market, isn’t it? From the beginning of the year, the S&P 500 has gained 16.4%, fueled by central banks’ quantitative easing actions around the world. We thought that the stock market was overvalued already at the beginning of the year…

If the central banks’ goal is to elevate the stock prices, they have done it successfully. But if their goal is to stimulate the economy, we are not sure if they have achieved their goal. But one thing is for sure, a higher current valuation of any asset classes always increases the risks of investing in them. A higher gain in the past means a lower gain in the future.

Now for the third time since 1970 (that is when our data become available), the total market cap index is more than 100% of the GDP. The other two times were in the late 1990s to 2000 and 2006 to 2007. Both ended badly, unfortunately.

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