Business Insider's Blodget: 'Stocks Are at Least 40 Percent Overvalued'

Thursday, 26 Dec 2013 07:39 AM

By Dan Weil

Share:
  Comment  |
   Contact Us  |
  Print  
|  A   A  
  Copy Shortlink
The stock market's torrid rally has left it vastly overvalued and vulnerable to a horrific plunge, says Henry Blodget, editor-in-chief of Business Insider.

"Every valid valuation measure I look at suggests that stocks are at least 40 percent overvalued," he writes on the service.

Among examples Blodget cites is that the cyclically adjusted price-earnings ratio, based on 10 years of profits, stands at 25, compared with a long-term average of 15.

Editor’s Note:
See Sean Hyman Explain His Biblical Money Code for Investing


In addition, the current ratio of stock market capitalization to revenue is 1.6, compared with a long-term average of 1.0, he notes.

And the ratio of stock market capitalization to GDP is twice the pre-1990s average, Blodget adds.

These data imply stock returns of about 2 percent per year including dividends over the next decade, he says.

But Blodget believes it's unlikely to be a regular pattern. Stocks tend to boom and bust, he notes.

"So the farther we get away from average valuations, the more the potential for a bust increases."

A crash of 40 to 55 percent is possible, based on the valuation data and the work of fund manager John Hussman, Blodget explains.

While the Standard & Poor's 500 Index has generated a total return of 31.2 percent so far this year, a 50 percent decline would put the index below 900.

"A careful study of history suggests that a crash is increasingly likely and that long-term stock returns from this level are likely to be crappy," he states.

However, many investors expect the stock market's ascent to continue.

"General economic conditions are showing a sustainable recovery pattern," Eric Teal, chief investment officer at First Citizens BancShares in Raleigh, N.C., tells Bloomberg.

"I think we'll continue to grind higher through year-end, and we anticipate that the fourth-quarter earnings outlook will be positive as well."

Editor’s Note: See Sean Hyman Explain His Biblical Money Code for Investing

Related Stories:

© 2014 Moneynews. All rights reserved.

Share:
  Comment  |
   Contact Us  |
  Print  
  Copy Shortlink
Around the Web

Join the Newsmax Community
Please review Community Guidelines before posting a comment.
>> Register to share your comments with the community.
>> Login if you are already a member.
blog comments powered by Disqus
 
Email:
Country
Zip Code:
Privacy: We never share your email.
 

You May Also Like
Around the Web

Most Commented

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved