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Was it really a collapse? Where is the market now? What is the catastrophe? The fiat currency system will fail? Gold will be the only true currency? Really? What catastrophe are we under right now? If you do truly feel that way, then, yes, surely leave the market, buy gold. Otherwise, it's just something to say (Peter Schiff). Remember, he said that the Dow Jones Industrial average would trade at the price of gold per ounce -- this was 2008. Today the Dow is at 20,600. Gold is 1,285. He never changes his tone. Is it possible that everyone n the world is right and he is wrong as opposed to the opposite? I'm not very bullish right now, certainly see downside risk, but I simply see no catastrophe, other than our news has been hijacked by click bait. Fuller analysis: VALUATION The market is definitely at a toppy valuation and bullish sentiment is definitely near all-time highs. First, we start with charts that cover valuations: Our image is from Factset: Back on December 31, the trailing 12-month P/E ratio was 17.9. Since this date, the price of the S&P 500 has increased by 6.9%, while the trailing 12-month EPS has decreased by 1.9%. Thus, both the increase in the “P” and the decrease in the “E” have driven the increase in the trailing 12-month P/E ratio to 19.5 today from 17.9 at the start of the year. (Source: Factset) And the real takeaway: “The current trailing 12-month P/E ratio of 19.5 is above the three most recent historical averages: 5-year (15.9), 10- year (15.9), and 15-year (17.6).” Conclusion: Any objective measure reads that the market’s valuation is high relative to its history. TECHNICALS We can look at other measures of valuation as well. For those that are technically minded: The top chart is a measure called the “RSI.” Any number above 70 generally reads as “over bought.” We are sitting at 72.4. The big chart is the S&P 500 — we leave that as the focal point of the analysis. The third chart is the %R, which is a momentum indicator. Readings from 0 to -20 are considered overbought. Readings from -80 to -100 are considered oversold. We are at -22.45. The fourth chart is the Stochastic Oscillator, which is another indicator of momentum where 20 is typically considered the oversold threshold and 80 is considered the overbought threshold. We are at 83.85. Conclusion: All three technical momentum measures read that the market is currently over- bought. SENTIMENT Market sentiment, which is usually a contrarian indicator, is extremely high. As a contrarian indicator, the higher it is, the worse it looks for equities. In the chart below we can see both the elevated level today, but also the low back in October 2008, which 6—months later was the signal of beginning of our current bull market run. In fact, according to Charlie Bilello of Pension Partners, “the % of bulls in the Investors Intelligence sentiment survey hit 63% this week, the highest since January 1987.” It is worth noting that peaks in investor sentiment, if they do portend a market sell-off, can be up to 6-months early in the signal. Conclusion: Investor sentiment is very bullish, at a level we haven’t seen in about thirty years. VOLATILITY Realized volatility has become a favorite headline for the mainstream media, but while the volatility has been extremely low, it has not been an indicator of poor returns. This is also from Charlie Bilello. It shows the 15 lowest volatility years and that eleven of the fourteen previous showed the S&P 500 ending with positive returns. Conclusion: Don’t read these headlines if they intend to remark on returns (not options), they are click bait and a waste of your time. There is no signal here, one way or the other. DIVERGENCE One of the worst things we can see from a market is when the indices rise because of a small number of mega caps and the rest of the market is actually drifting down. We aren’t quite there yet, but we do have a divergence. The S&P 500, which is market cap weighted, is now diverging from the equal weighted S&P 500, and that’s not a great sign. Conclusion: A divergence is forming and if it widens, it could be a sign of a weakening bull. INTEREST RATES Please read this carefully. Interest rates are at historic lows. The current rate environment is not the issue. The Federal Reserve just signaled that it would be raising rates soon, and it may be on a path to several rate hikes. It’s the several rate hikes part that is important, and here’s why: Jesse Felder shared this chart from BofA Merrill Lynch. The chart shows us that, in general, once rates get high enough, we can be on some shaky ground. Most recently the tech boom and the housing crisis both ended with a series of rate hikes and ended up in recessions. Conclusion: rates are at historic lows, but, if the rate hikes come fast and furious, they do tend to signal the end of a bull run, in recent history. EARNINGS The market rise is not irrational exuberance, rather it is a reflection of stronger earnings, stronger GDP growth, dropping jobless rates, and rising wages. Focus on the yellow bars — those are earnings. We finally broke out of our earnings recession and are showing some nice growth, with forecasts for more. Some of that is a monster rebound in energy due to oil prices, but not all of it. Conclusion: Earnings are growing and the earnings recession appears to be over. However, the market is rising faster than earnings. GDP We have been in a period of sustained GDP growth and while it has not sustained a growth level above 3%, we are well passed the doldrums of sub 1% growth. Perhaps most importantly, we got this read from the Bureau of Economic Analysis (our emphasis added): The increase in real GDP in the fourth quarter reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, residential fixed investment, nonresidential fixed investment, and state and local government spending. And now on to the critical issue of debt. DEBT The images we will share here come predominantly from the “QUARTERLY REPORT ON HOUSEHOLD DEBT AND CREDIT” published by the NY Fed. First, the mainstream media can’t help but sell click bait about Auto loans and the impending disaster. I kid you not, almost every major publication has drawn a parallel between the auto loan bubble we are in now, to the housing bubble we were in back in 2007. This is totally preposterous. Auto debt is exploding, but…. First: Auto loan debt is now at $1 trillion. Housing debt topped $12 trillion. Second: Auto loan debt is fixed rate (non-adjustable), has an average date to maturity of about 5-years and an average amount in the $25,000 range. Housing debt was becoming substantially adjustable (non-fixed rates), had an average date to maturity of over 25 years and an average debt amount well in to the several hundreds of thousands of dollars. To compare these two is nothing less than catastrophizing. Catastrophizing is an irrational thought a lot of us have in believing that something is far worse than it actually is. Catastrophizing can generally can take two forms. The first of these is making a catastrophe out of a situation. Conclusion: Auto debt is high, but it is nothing even near to close to that of the housing debt we once saw. Now, a lot more important images about debt: Mortgages Mortgage debt is rising, but is well below the levels we saw before the last recession. This image not only shows the magnitude difference in the debt, but also the quality of the debt. The dark blue, yellow, and light gray colors are the sub-prime debt. The dark gray and blue bars are the prime or ‘Alt-A,’ debt. Also, the median credit score for mortgages has been falling, but it’s still above the 750 high water mark. We can also look at the trends in late payment mortgages: We want to see the green line rising, which is loans moving from late to current, and the red line dropping, which is loans moving from 30-60 days late to 90 days late. We see both. Conclusion: Mortgage debt is rising, but it’s still not at a scary level. Credit scores are dropping, but they too are not at a scary level. Do note the trends. Broader Debt We can also look beyond just mortgages and Auto loans. Looking broadly at all installment debt (an installment debt is a loan that is repaid by the borrower in regular installments), loan delinquencies are pretty low and certainly well below the 15-year average. Conclusion: We are not in a debt delinquency crisis. We can also look at delinquent debt by type: Conclusion: Credit card debt, mortgages, auto loans, and HE (home equity) debt balances over 90-days delinquent are dropping. But there may in fact be a massive wave of trouble coming in the next few years from student debt. Finally, we can look at foreclosure and bankruptcy rates: Conclusion: Bankruptcies are on the decline and have been for over half a decade. Foreclosures are generally trending lower. Margin Debt Margin debt is just below all-time highs in real terms. Here is a great chart: Source: Advisor Perspectives The current level is at its record high. Note the inflation-adjusted version is just off its record high in April 2015. It’s hard to see in that chart above, but the percentage growth in margin debt is far outpacing the percentage growth in the S&P 500. Source: Advisor Perspectives A good portion of that margin debt was a Fed fueled zero interest rate policy (ZIRP), but the recent rise is just a good old fashioned debt pile to buy stocks. Source: Advisor Perspectives Conclusion: The data is not conclusive but there is circumstantial evidence that the retail public is partially fueling an equity boom with margin debt. Or… there is this chart: What we see is not that margin debt is growing unbounded, but rather that the underlying asset (the stock market) to debt is actually in a state of equilibrium. NOW WHAT? First of all, now you know what I know. You can use this data to come to any conclusion you feel comfortable with before I chime in. But, alas, I will chime in. The market, broadly, has gone beyond toppy to generally overvalued. I don’t think it’s “bloody murder end of the world” over-valued, but yeah, it’s high, and sentiment is remarkably bullish (which is usually bad) while margin debt is at an all-time nominal high. Now, some of that optimism is due to rising earnings, rising GDP, higher wages and dropping unemployment. More of it comes from rising home prices, which makes everyone “feel wealthier.” But, some of it is just speculation. The market has risen by more than earnings dictate, which has led to this high valuation and overly bullish momentum and sentiment. We are not in a housing debt bubble (which is different than a housing price bubble), and comparing an Auto bubble to a housing bubble is laughable.