US equities are very expensive relative to long-term historical valuations. The 10-year CAPE ratio is a valuation gauge that has been used extensively by Professor R. Shiller from Yale University. The meter divides price by the average of ten years of inflation-adjusted earnings and smooths cyclical noise.
It averaged roughly 17 over 160 years and is close to 40 today. Only in 1929 and 2000 have US equities been as overvalued as today. We know well what happened after both of these excesses.
Today, we face a similar situation again. The current valuations are not sustainable if history repeats. Mean-reversion, or getting back to historical averages, implies that the S&P 500 has to correct by roughly 50% from today's levels. Moreover, asset prices tended to exaggerate the upside and the downside.
Mean reversion implies disappointing returns for buy-and-hold investors during the next decade. The most likely Elliott Wave pattern shows how this scenario could play out. The end of the financial crisis in 2009 completed the fourth wave of supercycle degree.
It was the last leg of a correction pattern, which started as the tech bubble burst in 2000. Subsequently, cycle wave I trended within the pale grey trend channel higher until today.
A second wave correction of cycle degree is next. It will likely correct at least towards 2020 low and potentially lower if valuations behave as they did historically. From a textbook Elliott waves perspective, the black scenario shows the most likely path for the next few years.
Nonetheless, the correction has most likely not started yet. Historically, bear markets unfolded in recessions only. The US economy is not in a recession as of early 2022. Moreover, several reliable macro indicators have not signaled a recession yet.
However, they are likely in the last inning and slowly setting up for a signal. Therefore, monitoring the macro picture closely during the next few weeks makes sense. The bottom line is that a final rally towards 5000-5200 is most likely before investors have a 2000/2007 deja-vu.
It averaged roughly 17 over 160 years and is close to 40 today. Only in 1929 and 2000 have US equities been as overvalued as today. We know well what happened after both of these excesses.
Today, we face a similar situation again. The current valuations are not sustainable if history repeats. Mean-reversion, or getting back to historical averages, implies that the S&P 500 has to correct by roughly 50% from today's levels. Moreover, asset prices tended to exaggerate the upside and the downside.
Mean reversion implies disappointing returns for buy-and-hold investors during the next decade. The most likely Elliott Wave pattern shows how this scenario could play out. The end of the financial crisis in 2009 completed the fourth wave of supercycle degree.
It was the last leg of a correction pattern, which started as the tech bubble burst in 2000. Subsequently, cycle wave I trended within the pale grey trend channel higher until today.
A second wave correction of cycle degree is next. It will likely correct at least towards 2020 low and potentially lower if valuations behave as they did historically. From a textbook Elliott waves perspective, the black scenario shows the most likely path for the next few years.
Nonetheless, the correction has most likely not started yet. Historically, bear markets unfolded in recessions only. The US economy is not in a recession as of early 2022. Moreover, several reliable macro indicators have not signaled a recession yet.
However, they are likely in the last inning and slowly setting up for a signal. Therefore, monitoring the macro picture closely during the next few weeks makes sense. The bottom line is that a final rally towards 5000-5200 is most likely before investors have a 2000/2007 deja-vu.