There Is No Way This Bull Market Doesn’t End Very Badly

As stated above, in the short term, fundamentals do not matter. However, in the long term, they matter a lot.

Currently, investors are overlooking fundamentals on the expectation the economy and earnings will improve to justify the market overvaluation. There is scant evidence over the last 20-years such will be the case.The “Economic Activity Index” is an average of the 4-most essential components of organic economic activity. Interest rates have a long historical correlation to economic activity, along with inflationary pressures. Without productivity and business investment, jobs do not get created to support consumption which is ~70% of the GDP calculation.

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Bull Market End Badly, There Is No Way This Bull Market Doesn’t End Very Badly

Through the first quarter of 2021, the economic recovery expected by economists is running well ahead of what the index approximates. Furthermore, given much of the market’s advance is based on optimistic expectations, there is potential for disappointment.

Such is where fundamentals become extremely important. When, or if, expectations of recovery are disappointed, the market will begin to reprice itself for its intrinsic value. Given that the market is currently trading more than twice the level of underlying economic growth, which is where corporate profits come from, such suggests a significant risk.

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Bull Market End Badly, There Is No Way This Bull Market Doesn’t End Very Badly

The level of price versus sales, which occurs at the top of the income statement (and much less subject to manipulation, also suggests a risk.

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Bull Market End Badly, There Is No Way This Bull Market Doesn’t End Very Badly

10-year forward returns are below zero historically when the price-to-sales ratio is at 2x. There has never been a previous period with the ratio climbing to near 3x.

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Bull Market End Badly, There Is No Way This Bull Market Doesn’t End Very Badly

Of course, with markets trading well above 20x earnings, history further suggests that investors are likely to be disappointed in the future as markets reprice value.

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Bull Market End Badly, There Is No Way This Bull Market Doesn’t End Very Badly

Such is particularly problematic when investors chase stocks with no profits.

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