Sizing Up The Bubble - A Major Inflection Point Is Coming

Fund manager John Hussman is always good for dramatic charts. Here’s a recent one:

This ratio is even scarier than it looks, says Hussman:

Historically-reliable valuation measures now approach those observed at the 2000 bubble peak. Yet even this comparison overlooks the fact that in 2000, the overvaluation featured a subset of very large-capitalization stocks that were breathtakingly overvalued, while most stocks were more reasonably valued (see Sizing Up the Bubble for details). In many ways, the current speculative episode is worse, because it has extended to virtually all risk-assets.

To offer some idea of the precipice the market has reached, this chart shows the median price/revenue ratio of individual S&P 500 component stocks. This median now stands just over 2.45, easily the highest level in history. The longer-term norm for the S&P 500 price/revenue ratio is less than 1.0. Even a retreat to 1.3, which we’ve observed at many points even in recent cycles, would take the stock market to nearly half of present levels.

One of the reasons share prices have risen so dramatically relative to revenues is that corporations are earning a lot more on each dollar of sales these days. How are they doing that? By squeezing their workers.

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