While the market has performed pretty well so far in 2019, the threat of a sharp correction or bear market remains as present as ever because the market remains historically expensive.
The Shiller Price-to-Earnings (P/E) Ratio, which is the overall price-to-10-year-real-earnings ratio, is around 31, a mark not achieved too often in history. That means stocks costs 31 times more than their underlying earnings. In general, when the Shiller P/E Ratio is that high, it can lead to sharp corrections.
Similarly, the S&P 500 price-to-sales index is 2.1, the most expensive it’s been in history. And the Buffet Indicator, which measures market capitalization relative to Gross Domestic Product, is around 150, the second highest ever recorded.
This should have all investors concerned. Because while it’s still possible to find bargains out there, when bear markets awaken, usually everyone feels it.
Another warning sign may lie in the utilities sector. In the past when it’s been strong, market corrections and volatility tend to follow.
Well, the 3-, 4-, 5- and 6-week rate of change of utilities relative to the S&P 500 remains positive, meaning utilities are doing well when compared to markets overall. This could be a warning that recent gains may be illusionary and not longstanding.
Something is bothering the market. Whether it reacts remains to be seen.
Either way, the odds lean towards a decline soon – perhaps a major one. But that doesn’t mean it’s a sure thing. Still, even if it doesn’t happen, I’d rather be wrong and early than right and too late.