Are Stocks Cheap?

The ‘most hated’ rally as mainstream media types prefer to call this manufactured ‘market’ is flashing red warning symbols under the surface wherever one looks (from complacency to earnings and macro) but, for now, none of that matters. All too often valuations for nominal equity prices are justified by data that is just as supported by fiat largesse as the flow-driven headline-making indices themselves. However, as Diapason Commodities’ Sean Corrigan points out in this simple-to-understand chart, valuations for stocks are at extremes relative to the ‘real’ (even nominally inflated) economy. One glance at the chart of equity price relative to core capital goods orders and the message is clear – this is not an attractive time to be ‘buying’; instead a time to be ‘selling high’ from all your gains. But that is not a narrative that plays well with asset-gathering commission-takers (who are just as dependent on the Fed since ‘the AUM must flow’ to keep them in the way they are accustomed – paging Larry Fink).


The ratio of the S&P 500 to Core Capital Goods Orders (ExAir) has only been this high 4 times in the last 20 years. Each time it has marked a turning point in the cycle. On the other hand, the ‘low’ end of this ratio has been an excellent time to be entering stocks for a nominal surge.

Unless we are greeted with an enormous jump in capital goods orders – something that is self-evidently not occurring judging by PMIs, ISMs, and practically every data point (except NFP) – then equity valuations are ‘stretched’.


Charts: Bloomberg and Diapason Commodities


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