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Will this bull market last?

The US stock market has just broken the all-time record for the longest bull market ever. It has been generally rising for nearly a decade straight. And there’s no end in sight.

 

But there are a lot of things that might make a rational person scratch their head.

 

The Russell 2000 index (comprised of smaller companies whose shares are listed on various US stock exchanges) is currently at its all-time high. Yet 60% of corporate debt issued by companies in the Russell 2000 is rated as JUNK.

 

How is that possible– a junk debt rating coupled with an all-time high? It’s as if investors are saying, “There’s little chance these companies will be able to pay their debts… but screw it, I’ll pay a record high price to buy the stock anyhow.” It doesn’t make sense.

 

Looking at the big companies on the S&P 500 index, the current ‘CAPE ratio’ is now the second highest on record. ‘CAPE’ stands for ‘cyclically-adjusted price/earnings ratio’. It refers to how much investors are willing to pay for shares of a company, relative to the company’s long-term average earnings.

 

Right now investors are willing to pay 33x long-term average earnings for the typical company in the S&P 500. The median CAPE ratio based on data that goes back to the 1800s is about 15.6. So at 33, investors are literally paying more than TWICE as much for every dollar of a company’s long-term average earnings than at any time in history. And it’s only been higher ONE other time– just before the 2000 stock market crash. 33 is higher than right before the 2008 crisis. It’s even higher than it was before the Great Depression.

 

In addition to the CAPE ratio, the average company’s Price-to-Book ratio is also the highest since the 2000 crash – investors are not only paying a near record amount for every dollar of a company’s long-term average earnings, but they’re also paying a near record amount for every dollar of a company’s net assets.

 

The list of these record / near-record ratios goes on and on. Investors are also paying an all-time record Price-to-Revenue ratio… meaning that investors have never paid a higher price for every dollar of a company’s revenue… EVER.

How does that make sense? 


 

Mr. X’ wishes to keep his identity private. All we can say is he’s a private investor based in Bahrain.

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