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The smoothed cyclically adjusted PE ratio (CAPE) multiple says the same thing. It never did actually compress to a normal recession-trough multiple in March: it briefly touched 24.8x and has since jumped to 30.6x. It is almost back to the 30.7x peak it had in February (ahem) and the prior peak before that in October 2018 when it was as high as 31x (next thing you know, we are in for an unforeseen near-20-per-cent correction).
The current multiple actually exceeds the 27.3x peak of October 2007… and we know what happened next. Before the tech mania, that is, before June 1997, not once did we have the CAPE north of 30x for one month, until we go all the way back to September 1929 (32.6x).
This isn’t to say something calamitous is going to happen. But this market is trading at dangerously high valuations should anything — financial, economic, political — not go according to plan.
The higher they are, the harder they fall. There is no margin for error here and history shows multiples at these levels leave the market exposed compared to when they are at more reasonable or normal levels. It should go without saying that you know we are in a truly abnormal environment when the market in the past was less pricey more than 99 per cent of the time.
Valuations matter until they don’t matter and by then it’s too late. Or, as Wall Street veteran Bob Farrell put it, bull markets can go further than you think, but they don’t correct by going sideways.
Once the Chuck Prince dance-a-thon ends — and it will, we just don’t know when — you do not want to be standing too far from the exit signs.
David Rosenberg is founder of independent research firm Rosenberg Research & Associates Inc. You can sign up for a free, one-month trial on ?his website.