CNBC says stocks are massively overvalued.
Market valuation can be measured in many ways, but one comparison of equity values to economic output yields a troubling conclusion.
Right now, the total market cap of the Wilshire 5000 index as a percentage of U.S. gross domestic product is about 120 percent, far above the 45-year average of 75 percent. To some, this indicates that stocks are priced too richly, and hence may not be a good buy at these levels.
Yes, you say, but Trump economics will boost the economy and the GDP will go way up bringing the Wilshire to GDP ratio back to historic norms. Unfortunately even the 4% growth that Trump’s people say the nation can attain will not be enough.
“even if we were to see exceptionally fast growth over the course of the next eight years to the tune of 8 percent nominal GDP growth per year, we would still be at 80 percent market cap to GDP, which still puts us above that long-term average,” Mark Tepper, president of Strategic Wealth Partners, said Friday on CNBC’s “Trading Nation.”
Every time the Market becomes overpriced there are analysts saying that times are different and the market is different and every time they are wrong because the market corrects or crashes.
And, how badly are stocks overvalued if Trump’s plans do not work out? What if he indeed starts a global trade war? Business Insider quotes Goldman Sachs on how Trump will escalate a trade war with China.
US President Donald Trump’s trade advisor, Peter Navarro, proposed a blanket 45% tariff on all Chinese-made goods.
And Goldman Sachs analysts Andrew Tilton and Alec Phillips said they saw “little reason to believe” that Trump would back down on imposing restrictions on Chinese imports such as on steel and machinery.
“We believe the Trump administration is likely to make an announcement on China’s currency policy and impose unilateral tariffs on a number of products,” the analysts said in a note to clients. “In general, we expect this administration to be much more active in using existing ‘trade enforcement’ tools than recent administrations.”
Analysts believe that Trump would start with limited actions instead of blanket tariffs because enactment of the 45% plan would immediate ignite a trade war with the Chinese raising tariffs on US goods to 80 or 90%. The sad fact is that the most Trump-friendly cities will be hurt the most by a potential trade war according to Fortune.
The top five U.S. cities that depend the most on exports include Columbus, Ind.; Beaumont, Texas; Lake Charles, La.; Elkhart, Ind.; and Kokomo, Ind. Larger cities likely to be most affected in a trade war include Baton Rouge, La; Wichita, Kansas; New Orleans; Seattle; and Detroit, the report said.
Such communities have less flexibility to adapt to the effects of a trade war, Mark Muro, head of Brookings’ metropolitan policy program, told the Journal.
Parts of the USA that are less flexible and more dependent on exports would be hurt the worst by a trade war. If this comes down you can expect stocks to fall dramatically. How badly are stocks overvalued now if there is a looming trade war? Think in terms of 2008 or more likely 1929 and the Great Depression that followed.
