EC Why I'm Slashing My S&P 500 Exposure

The S&P 500 (SPX) is very rich and it should be faded as much as possible. The U.S. market is richly valued with a Total Stock Market Value to GDP of 132.9%. The Fed has started to tighten, and with delinquency rates are currently low, lending standards have started to loosen again. Insiders are very cautious and the Baltic Dry Index is not indicating a pending recovery.

The Buffett indicator

Warren Buffett famously proclaimed the total stock market value to GDP ratio as the best “one” indicator of future stock market returns. Currently Total Stock Market Value comes out to 132.9% of GDP which is very high in a historic context. Huge successful startups like Uber, Airbnb and Palantir are not even going public which is a headwind to total stock market value or it would have been even higher.



I picked this particular fundamental value ratio but it’s actually hard to find a ratio that doesn’t rate the market as expensive. The famous CAPE ratio would have worked just fine and the S&P is richly valued judging by mean PEs or price to cash-flow ratios as well, when put in a historical context.

Bulk shipping

The Baltic Dry Index is a great proxy for dry bulk shipping prices. Prices are a result of available transporting capacity and demand for said capacity. Capacity enters the market through ships delivered and exits the market when vessels are scrapped. Because it takes some time to build ships it is rather obvious when supply is entering the market. It’s not as obvious when ships get scrapped as it can happen fast once scrap rates jump. The higher steel prices, the more vessels get scrapped.

Demand is very unpredictable but it is a necessity for emerging markets to get going. Emerging economies require a multiple of commodities to power their infrastructure build outs compared to mature economies. This results in the Baltic Dry Index being an interesting indicator because when rates go up this indicates construction is going to pick up. After the materials arrive, builders get hired and sometimes the resulting infrastructure actually enables additional economic activity after it is finished.

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Chee Hin Teh 3 years ago Member's comment

Thanks for sharing

Fabrizio Galvez 3 years ago Member's comment

When you think of a healthy Total Stock Market Value to GDP ratio, does any number come to mind? What would you say is a good TMC/GDP ratio?

Bram De Haas 3 years ago Author's comment

Really good question Fabrizio. Maybe it's helpful to realize historically the range for the U.S. has been between 35% and 149%. Obviously 132.9% is much closer to the high end of the range.