Posts filed under “Quantitative”
Today, I want to bring a simple analysis to your attention. It is based upon the chart of GDP versus the total stock market valuation:
Another measure bodes worse, however. That’s a comparison of the total value of U.S. shares with the yearly output of the U.S. economy (see chart). The stock market is once again the larger of the two. When that happened during a dotcom stock bubble in 2000 and during the U.S. housing bubble in 2006, the result was a stock plunge in subsequent years.
It contains several flaws worth noting.
The first is our longstanding admonition against evaluating investments against a single variable (See this, this and this). But even based on that simplistic analysis, Stocks relative to GDP are not anywhere near a danger zone.
In 2006, stocks crossed GDP at about an 8 trillion dollar capitalization.It took another 4 years and a gap of about 70% ($9.5 trillion GDP vs $17 trillion equity valuation) before the market topped out and reversed.
The same pattern held in 2003 — Equity capitalization crossed at about $11 trillion, and it took another 4 years and 70% before markets topped out near $19 trillion.
Hence, even if you want to use GDP (versus Capitalization) as your single variable, it is rather premature basis for calling the top in equities.
While there are lots of reasons to be concerned about future S&P500 gains, earnings and market cap relative to GDP isn’t one of them.
Single vs. Multiple Variable Analysis in Market Forecasts (May 2005)
Understanding How to Analyze Market Metrics (July 2008)
Complexity, Context, Probability & Bias (March 2012)
Stocks Have Outgrown the Economy
SmartMoney, May 02, 2012
By using predictive analytics, Target doesn’t just track when customers buy sheets, they know what customers are doing between the sheets. The Word – Surrender to a Buyer Power The Colbert Report Get More: Colbert Report Full Episodes,Political Humor & Satire Blog,Video Archive Wednesday February 22, 2012
> Apple is disproportionately impacting indices and earnings data, skewing the picture of what is actually occurring. WSJ: “While most U.S. companies have struggled to meet earnings expectations, the Cupertino, Calif.-based maker of iPads and iPhones has surpassed even the most bullish of expectations, reporting $13.1 billion in profits during the fiscal 2012 first quarter…Read More
> I am the keynote speaker today at the Dow Jones event: Correlation Nation: What happens when all markets and asset classes are in correlation? As markets trade on headline risk versus pure fundamentals, finding a winner is more challenging than ever before. Kelly Evans hosts a panel discussion afterwards, with a reception to follow….Read More
Over the years, I have become friendly with Mebane Faber, co-founder and the Chief Investment Officer of Cambria Investment Management. He manages an ETF called the Cambria Global Tactical ETF (GTAA). Back in 2007, Meb authored an excellent paper titled “A Quantitative Approach to Tactical Asset Allocation.” It was published in the Journal of Wealth…Read More
I was pleasantly surprised this morning to see a WSJ article that suggests the SEC is beginning to use the tools of Quantitative Research in its enforcement: SEC Ups Its Game to Identify Rogue Firms. This is a positive step for enforcing the laws governing markets. Recall 3 years ago, we asked if the SEC…Read More
James O’Shaughnessy is a well known “value quant” for his book What Works on Wall Street (4th Ed). He has a new column in Marketwatch discussing what he calls “the top stock-market strategy of the past 50 years.” According to Jim, using a combination of value and momentum strategies — “Trending Value” — is the best…Read More