One indicator of stock market prices suggests that the bullish trend, on fuel, may be too shaky.
The cyclically adjusted price-yield ratio of the S&P 500, or CAPE, is at its highest point since the 2000s, Deutsche Bank strategist Jim Reid said in a note. It also exceeds its levels just before the market crash in 1929 and the last high in January 2018.
The sensor measures average income adjusted for inflation over the past 10 years, as opposed to current earnings. The ratio was popularized by the famous economist Robert Shiller, and is also known as the Shiller price-profit ratio.
The CAPE coefficient reached 33.71 on Monday, which is double the historical average of 16.72. In December 1999, it reached a record high of 44.19.
The high reading came as stocks fell from record highs reached on Friday. Us stocks fell on Monday, as an increase in the number of applications to buy COVID-19 prompted the introduction of new economic restrictions in California. While hopes for a vaccine continue to inspire risky measures, public health experts have said that the pandemic is likely to worsen before the shot becomes widespread.
The CAPE coefficient is usually used to assess whether the market is overvalued or undervalued, but it should be taken with disbelief, reed said. On the one hand, since the beginning of 1991, this indicator has been higher than its long-term average, except for a 10-month period during the financial crisis.
"If this ratio really means a return (which it probably does), then it may take a lifetime of investment and structural shifts to do it in both directions," the strategist said.
A small set of stocks with mega-cap technologies played a role in the increase, reed added. The market's largest stocks are having an impact on CAPE in a way that "they've probably never done it before" and will most likely determine whether the indicator will swing higher immobile or regain its growth.