The broader indices have been in a raging bull market since the COVID-19 induced lows in March of 2020. The rally has been largely uninterrupted, with minor blimps in September and October before reaching all-time highs by early December. The initial rally was narrowly focused on technology and the stay-at-home economy stocks. With the improving vaccine prospects, November saw a sea change with broad market participation with value stocks breaking out with huge moves to the upside. To boot, massive stimulus coming out of Washington is being priced into the markets. All three major indices (S&P 500, Nasdaq, and Dow Jones) are at all-time highs. Are stocks overextended underpinned by irrational exuberance considering the damaging economic consequences that COVID-19 inflicted on the worldwide economy? Are markets getting ahead of themselves as investors bet on a return to normal for the global economy? Stretched valuations, options put/call ratios, broad participation, and P/E ratios may be potential warning signs of near-term pressures.
Fundamentals – Lofty P/E Ratios
Price-to-Earnings ratios are largely discordant with the economic backdrop and at historically lofty levels. Outside of the tech bubble in 1999/2000, the current P/E ratio of the S&P 500 composite is the highest on record, exceeding that of the Roaring Twenties (Figure 1). Continue reading "Irrational Exuberance?"