2021 Begins With Markets Overvalued, But Will It End That Way?

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During my holiday break the Dow Jones continued advancing.  Not as if it were on fire, but it did make six new BEV Zeros in the BEV chart below, and remained within 1% of one every day since December 18th.

C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 691\Chart #1   DJ BEV 2007 to 2021.gif

Here’s the Dow Jones in daily bars below.  The Dow (DIA) has advanced since the November 3rd Presidential election; that’s a little more than two months.  This could go on for a while, but I’m thinking the next move will be down.  So if you’re not in already, this isn’t the type of market to begin buying into.  

With a little patience investors will find better bargains in the coming year.   But bargain buying in the stock market means someone is willing to buy when everyone else is selling, or even better; buying after everyone else has finished selling at a considerable loss.  It’s the timeless market rule-of-thumb that one should sell into market strength (market tops) and buy into market weakness (market bottoms).

C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 691\Chart #2   DJIA OHLC.gif

So what do I know?  I know I don’t like this market.  So much so that should the Dow Jones deflate by 50% by May, I’d still fear Mr Bear has much worse coming for the bulls.  The problem I have with this market is the “policy makers” have absolutely refused to allow it to deflate to a natural bear-market bottom since Alan Greenspan became Fed Chairman in 1987.  I say that based on dividend yields for the Dow Jones.  

Bear-market bottoms used to see the Dow Jones yielding something over 6%.  The Dow Jones hasn’t seen a dividend yield of 6% since 1981, and has been overvalued (yielding less than 3%) since 1987.  At the March 2009 bottom, a 54% decline during the credit-crisis crash, the second deepest percentage decline the Dow Jones has seen since 1885, the Dow yielded only 4.74%.

Had Mr Bear been allowed to deflate the stock market as he once did, and taken the Dow Jones down until it yielded something over of 6%, the Dow Jones would have seen at a minimum a 64% market bottom.  But Doctor Bernanke and his three QEs made sure that didn’t happen.  The FOMC did same thing last March, which I’ll discuss later.

The table below illustrates my problem with our current low dividend yields for the Dow Jones. The Dow closed the week at 30,814, paying out $604 and yielding 1.96%.  Rounding the payout to $600 and the yield to 2.0%, fixes the Dow Jones at 30,000 in the table below.  Taking the yield up to 6% deflates the Dow Jones to 10,000 for a 66% market decline.  Should the dividend payout be cut by 50%, down to $300, that deflates the Dow Jones to 5,000 for an 83% market decline.  During the depressing 1930s, the Dow Jones’ dividend payout was reduced by 77%, which would take our current payout down to $150.

Today, in an age when market valuations are managed by Ivy-League economists dictating “monetary policy” at the FOMC, looking at historic benchmarks for the Dow Jones’ dividend is an archaic method of valuating the stock market.  But these idiot savants' little tricks for inflating market valuations are only going to work for so much longer.  When they can no longer dictate market valuations, I expect Mr Bear will once again step in and we’ll see yields for the Dow Jones, mortgages and corporate bonds soar far above where they are today as market valuations deflate to levels few “market experts” can conceive of today.

The table above should give reason to resist coming back into the market when the stock market is finally allowed to deflate to where the Dow Jones is yielding something over 6%.  The Great Depression Crash deflated the Dow Jones by 89%; let call that 90% and place the Dow Jones last all-time high (31,097.97 or 0%) into the table.  Seeing a 50% decline may appear to be a good buying opportunity, but doing so and holding on until the bottom of a 90% market decline would see one’s investment decline by whopping 80%.

Are things really that bad?  Look at the Nasdaq Composite Index (COMP) below; since March 23rd (black circle) the Nasdaq has advanced by 90% at the close of this week, and the Russell 2K closed the week up 112% in the past ten months.  These gains are the result of the FOMC “injecting” massive levels of “liquidity” into the financial system.  In other words, these gains are purely inflationary market events with no real connection to the underlying economy.

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Disclosure: None.

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