Bearing Down

Go on
Take the money and run
--Steve Miller Band

Yale's Robert Shiller discusses three current market conditions similar to those preceding most historical bear markets. One condition is valuation. Using his CAPE metric, the value of the S&P 500 has only been higher before the 1929 crash and the dot.com pop.

Another condition is high earnings growth. Huh? Shouldn't high earnings growth be good for stocks? Unfortunately, earnings growth is often highest just prior to big market declines. Shiller notes that in 13 prior bear market cases, annual earnings growth averaged over 13%. Over the past 12 months S&P earnings growth has averaged...13.2%.

Finally, average stock market volatility is low. In terms of the standard deviation of monthly percentage stock price changes, volatility is about 1.2%. From 1872 until 2017, the average is about three times as high at 3.5%. Lower vols lead to compression, which leads to...higher vols.

The message: For investors, things may not be as good as they appear.