Market indicators suggesting a correction is coming

On Black Tuesday Shiller PE Ratio was at 30. Today it is at 26.2 and volatility is back in a big way. from My Budget 360

Volatility is back in a big way for the global economy.  Not that it went away but for a couple of years central banks fooled the public into believing that perpetual debt was a good way to rejuvenate the markets.  There will be no free lunch.  Oil crashed rather dramatically. Greece is reigniting further issues with the Euro.  Russia is on the brink of recession.  Half of Americans live paycheck to paycheck.  Inflation is alive and well only if you bother to look.  Overall volatility is back in a big way in the global markets.  The Baltic Dry Index which is a good measure of shipping goods has collapsed.  You would think that if demand were so healthy, shipping goods would be soaring.  The only thing soaring is stock markets based on inflated values.  The S&P 500 is overvalued by 60 percent looking at historical price-to-earnings ratios.  The Shiller PE Ratio was at 30 on Black Tuesday.  Today it is at 26.2 with the historical average being closer to 16.

Stocks are overvalued based on earnings

Stocks are incredibly overvalued based on earnings.  While companies like Amazon and Apple blow it out of the water, many others are not.  The current PE ratio is inflated.

When you evaluate a company looking at price-to-earnings is important.  How much are you willing to pay to get a dollar back?  In essence that is what we are looking at with the PE ratio and right now we are looking frothy:

Shiller PE Ratio

snp 500

Stock values are inflated based on current earnings.  More important, we need to realize that many companies are using debt to leverage their balance sheets.  Other companies have cut wages and benefits to increase the bottom line for a few at the expense of the many.

Take a look at the Baltic Dry Index:

baltic dry index

What this is signifying to us is that the demand to ship goods is low thus pushing prices lower.  The last time we saw a crash like this we ended up with the Great Recession.  Take a look at oil prices:


Oil has collapsed in the last few months alone.  Many were getting accustomed to $100 a barrel oil only to see it drop to $47 a barrel.  The big push for this is plenty of supply with moderating demand.  Then you have OPEC maintaining output to flush out high cost producers and gain market share.  Of course this hit is going to reflect in oil producing countries like Russia, Canada, and Venezuela.

Volatility is the name of the game in this current market.  Over half of recent college graduates are underemployed:

college grads

Does any of this sound like a stable market?  Having a system addicted to perpetual debt is not a solution.  It is merely a temporary measure to allow the financial wizards to siphon off real production into their hands.  In housing you had Wall Street buy up many homes driving prices higher and rents higher only to suck away more income from working families.  How is that good?  This was subsidized by the Fed with their negative interest rate policies.  Again, nothing comes for free in this world.

The S&P 500 has gone up 200 percent since 2009.  A correction is bound to happen and the amount of volatility hitting the system currently is bound to expose some cracks.

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