Could stocks be overvalued? The ratio of market capitalization to GDP, which Warren Buffett once said is "probably the single best measure of where valuations stand at any given moment," is now approximately 150 percent above its pre-bubble norm — far beyond nearly every point in its history.
Perma-bear fund manager
John Hussman of Hussman Funds noted Buffett's market cap-to-GDP observation as he called attention to last week's record high in the S&P 500.
"Investors who feel that zero interest rate policy offers them 'no choice' but to hold stocks are likely choosing to experience negative returns instead of zero," he predicted in his weekly newsletter.
Editor’s Note: New Warning - Stocks on Verge of Major Collapse
"While millions of investors appear to have the same expectation that they will be able to sell before everyone else, the question 'sell to whom?' will probably remain unanswered until it is too late."
Hussman, who is known for his criticism of Federal Reserve policy and his correct prediction of the 2008 financial meltdown, said persistent thin trading volume in U.S. stocks shows the market is merely in a churning mode.
"The investors who successfully leave the equity market at current valuations will exit through a needle's eye," he warned.
By Hussman quantitative calculations, the Fed's efforts to keep interest rates near zero comes at the expense of returns in future years.
He calculates that current U.S. stock valuations are logical "only if one assumes more than two decades of zero interest rate policy" — and even then imply low equity returns in the "mid-single digits."
Hussman noted the
Bank for International Settlements (BIS)'s annual report warns that efforts by central banks to prop up their national economies with huge monetary stimulus probably has a stiff price tag.
"Financial markets have been exuberant over the past year, at least in advanced economies, dancing mainly to the tune of central bank decisions," the BIS report stated.
"In the countries that have been experiencing outsize financial booms, the risk is that these will turn to bust and possibly inflict financial distress. Based on leading indicators that have proved useful in the past, such as the behavior of credit and property prices, the signs are worrying."
Yahoo Finance's Jeff Macke said it is normal for investors to be concerned about stocks hitting an all-time high last week, but that does not mean a financial meltdown must follow in short order.
Macke thinks stocks are fairly valued at current record levels.
"Something about the stock market being at record highs just rubs Americans the wrong way," Macke said.
"Big round numbers like Dow 17,000 have no fundamental importance, but they do offer sort of an emotional rest stop."
Editor’s Note: New Warning - Stocks on Verge of Major Collapse
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