Nobel laureate indicator advises selling shares

In one of our previous reviews on the bubble in the US stock market, we wrote about the record high values of the "favorite Buffett indicator" (the ratio of the country's stock market capitalization to its GDP).

In principle, this alone is enough to think about selling stocks in the US stock market. But the real number of signals of the impending market crash is many times greater.

Today we’ll talk about another very popular metric - the so-called Schiller indicator (CAPE). Note that Schiller is a Nobel laureate in economics and is considered one of the founders of behavioral finance. That is, his opinion is one of the most authoritative, at least in the academic environment.

At one time, he developed an original metric to determine whether the stock market is overvalued or underestimated. We are talking about the Shiller P/E ratio (CAPE) indicator, which is the ratio of the market price of shares (or shares in the index) to the net profit of the company (companies in the index) over the past 10 years, adjusted for inflation.

So at the moment, the Shiller P/E ratio for the S&P500 is 31.31 - one of the highest values ​​in the history of the US stock market. This is almost 2 times higher than the average historical value of the indicator.

What is this talking about? That the market is overbought. This is confirmed by other metrics, starting from the Buffett Indicator, ending with the usual P / E for the S&P 500 (now it is almost 25, which is almost 2 times higher than the average historical value) and the ratio of capitalization to gross revenue (now this indicator is 2.37, which is an absolute record for all the time, even during the dot-com bubble, there was no such high indicator value).

As you can see, for the metrics to return to their average values, the US stock market should adjust by 40-50%.

Recall that we consider 2019 the last year of unjustified growth in the US stock market. Already in 2020, it will begin to adjust. The scale of correction is from 50% and higher. Given that in recent years, shares of technology companies in the US stock market have grown by an average of 7-8 times (and some issuers have shown growth of 10 or even 20 times), the US stock market will no doubt become the object of massive sales. We recommend participating in this process, selling both the market as a whole (Nasdaq index) and the shares of individual issuers (Apple, Microsoft, Alphabet, Oracle, etc.).