Is this the July 1929 Stock Market?

 

We just can’t get 1929 out of our minds. I say we because I know that are a few others out there who are still haunted by the crash that led to the Great Depression and World War II.

Why? I think, for one reason, the crash seemed to appear out of no where and became devastating.  And although the “Great Recession” of 2007-2009 was very bad, it did not lead to the devastation of post-1929.

I believe the Great Recession was the first shot across the bow.  And to fight it, the major central banks of the world did the only thing they knew how and that was to flood the world with cash to prevent deflation.  

So here we are, 8 years and 4 months from the low in March 2009.  And where do we find ourselves? July 1929. 

July 1929 Stock Market

I say July 1929 stock market because that is right where the most recent Cyclically Adjusted Price Earnings Ratio (CAPE) reading of 30.05 puts us. Slightly higher than July 1929 and slightly lower than August 1929.  

Only 2 months in 1929 had higher readings…August and September. The high close of the DJIA occurred August 30, 1929.

I’ve talked about Professor Shiller’s CAPE several times before.  This indicator is like a warning flag. It will not help with exact timing. BUT, to ignore the perspective it provides… is foolish. 

The only other time that the 1929 peak CAPE reading was surpassed was in the late 1990’s when the stock market ran to historic over-valuation. 

Current Over-valuation

Prior to the start of the Great Recession, the CAPE had a high reading of 27.55 in May 2007, slightly higher than the 27.32 reading when the market peaked in October 2007. We surpassed the 2007 high in December 2016.

I recently came across an article from June where Mark Hulbert wrote about another indicator that  is at an extreme reading, only surpassed by readings in the late 1990’s.

This indicator is primarily used, as CAPE was designed, to indicate expected stock market returns 10 years out. According to Ned Davis Research this indicator, stocks as a percentage of household financial assets, has an even higher correlation to stock market returns than CAPE.

That data only goes back to 1950 while Professor Shiller’s data goes back to 1871.

And there is the report of Paul Tudor Jones’ comments back in April.  He was focused on the stock market’s valuation relative to the size of the economy.  Now only exceeded by the dotcom bubble.

So I continue to monitor the stock market waves as we get closer to the end of this historic market run.  I think the market is sufficiently doing its part by teaching everyone to continue buying the dips.  

It reminds of the game of musical chairs.  It works until the music stops. And the July 1929 stock market was just weeks away from the music stopping.

Asia Update

Today’s video looks at India’s Nifty 50, China’s Shanghai and Shenzhen indices and checks in on Alibaba (BABA), Baidu (BIDU) and JD.com (JD).

 

 

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