Moody’s: Bonds And Stocks Overvalued, Watch Out For Liquidity Event

On yet another positive day for the stock market in the face of major macro headwinds from French elections to war with North Korea and potential for compromise not to be reached on a budget deal, there are two separate issues that will likely tear down the bull market run, a Moody’s report noted. One of those events would have bond yields rising slightly above levels seen this past March 6, 2017.

Stocks overvalued based on several historical revenue standards

“Stocks are not cheap,” Moody’s Chief Economist John Lonski, wrote in the firm’s weekly market analysis. Noting that “US equities remain untenably overvalued,” Lonski is looking for the next shoe to drop. 

In an April 6 research piece titled “Bond Yields Will Fall When the Equity Bubble Bursts,” Moody’s notes the multiple paid on pretax profits from current production was a level “unheard of prior to 1998.

One of two issues that concerns Lonski is the ratio of the market value of US stocks to yearlong pretax operating profits. This rose to 11.5:1 in in the fourth quarter of 2016, marking the highest such ratio since the second quarter in 2002 when a 12.5:1, immediately following the “tech wreck” stock market crash of 2001.

The average ratio is 14.8:1, achieved in 1999, just prior to the equity market’s value climbed to a record 17.3-times profits in the third quarter of 2000.

But that is not all. Stocks are expensive on several levels, including relative to corporate revenues.

Lonski noted as of the second quarter 2015, the market value of US stocks rose to a cycle high of 218% of corporate gross-value-added, a proxy for total corporate revenues. Second-quarter 2015’s ratio for the market value of common equity to corporate gross-value-added (GVA) was the highest since the 225% of third quarter 2000 just after equity valuations peaked at a record high 231%. During 2002-2007’s business cycle upturn the ratio failed to reach 200% and the market value of common stock reached a high of 185% of corporate GVA in the second quarter of 2007.