3 Valuations Making Strong Case For Stock Market Crash In 2021

2020 Was Great, But There Could Be a Big Stock Market Crash in 2021

The stock market is at an all-time high, but don’t get complacent. A stock market crash could happen in 2021.

You see, in the short term, the stock market moves on noise, emotion, and sentiment. In the long term, valuations really matter. The higher the valuations, the higher the risk of a stock market crash.

Stock Market Crash 2021

Throughout 2020, stock market valuations got really expensive, but the mainstream media did a horrible job at telling investors about this. It’s not just one indicator or measurement saying stocks are expensive. The list of indicators flashing warning signs to investors continues to get bigger.

3 Stock Market Valuations Every Investor Must Watch

There are three basic stock market valuations that investors should pay attention to: the price-to-book (P/Bratio, the price-to-sales (P/S) ratio, and the cyclically adjusted price-to-earnings (CAPE) ratio.

The P/B ratio tells us how investors value each $1.00 of equity in the stock market. The P/S ratio tells us how investors value each $1.00 of sales, and the CAPE ratio is essentially a better version of the price-to-earnings (P/E) ratio—it tells us how investors value each $1.00 of earnings.

Mind you, the face values of these measurements really mean nothing. You must compare them with historical averages and turning points.

Putting things in perspective…

As it stands, the P/B ratio of the S&P 500 stands at 4.10. The last time this stock market valuation was this high was back in the early 2000s. (Source: “S&P 500 Price to Book Value,” Multpl.com, last accessed January 5, 2021.)

Guess what? That was just before a massive stock market crash.

The P/S ratio of the S&P 500 is currently 2.70. In the last 20 years, the ratio has never been this high! (Source: “S&P 500 Price to Sales Ratio,” Multpl.com, last accessed January 5, 2021.)

Lastly, the CAPE ratio stands at 33.44. The last time this ratio was this high was back in 2001. Moreover, the long-term average of the CAPE ratio is around 17.0, which means the stock market is overvalued by more than 96%. (Source: “Online Data Robert Shiller,” Yale University, last accessed January 5, 2021.)

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Disclaimer: There is no magic formula to getting rich. Success in investment vehicles with the best prospects for price appreciation can only be achieved through proper and rigorous research and ...

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