Median Stock Valuation In 99/100% Percentile In Terms Of PEG, PS, EV/EBTIDA, P/B, But…

After a decade of rising asset prices, but lackluster economic growth and real price expansion is it time to start worrying about bubbly markets? That’s the question Goldman Sachs’ Chief Global Equity Strategist Peter Oppenheimer asks in the bank’s September Global Investment Research monthly presentation about the bear necessities in a down market.

Bear Necessities

Since January 2009, there has been a wide dispersion between asset price inflation and the ‘real economy’ inflation. As shown in the chart below, asset prices have surpassed the returns of all 'real economy' metrics since the crisis by a significant degree. 

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The rally in asset prices has taken valuations to record highs. Goldman's analysts point out that this is the second-largest and longest bull market in recent financial history and valuations look very stretched in the US. The valuation of the median stock is in its 99% percentile on most 

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However, despite frothy valuations, when compared to bonds, equities appear undervalued although it's not clear if this is a result of expensive bond markets or cheap equities.

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Trying to predict if or when the next bear market will emerge is not a precise science, but Goldman has compiled the data for the 12 major bear markets in history to try and figure out what sets off a market decline, and how the market reacts when it starts falling.

According to the research, there are three major bear market types; Cyclical, typically a function of rising interest rates, impending recession and falls in profits; Event-driven, triggered by a one-off 'shock' that does not lead to a domestic recession and; Structural, triggered by imbalances and financial bubbles. Very often there is a 'price' shock.

Goldman finds that typically, in the year before a bear market begins, the S&P 500 gains 21% before a period of volatility that lasts for around 100 days or more. Following this volatility, the average S&P 500 bear market usually takes the index down by 32% on average. 

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