The Market Is Disconnected From Everything

The market is disconnected from everything. Throughout history, there are correlations you would expect to hold constant between the market, consumer confidence, and the economy. Currently, after a decade of zero interest rate policy, massive amounts of liquidity, and financial supports, the market has become detached from reality.

Of course, such should not be surprising as we witnessed previously throughout history. Whether it was 1929, 2000, or today, the basic measure of the market disconnect, and investor exuberance, was valuations.

The most obvious is the Shiller CAPE ratio which takes current prices dividend by 10-years of earnings. This method smoothes out the volatility of earnings that can occur on an annual basis. At 40x trailing earnings, current valuations are higher at the peak of the market in 1999.

The Market Is Disconnected, The Market Is Disconnected From Everything

Importantly, valuations are only the mathematical representation of investor psychology. At the peak of every major market cycle, investor exuberance ran amok. Notably, at the peak of each cycle, investors believed “this time was different,” whether due to some new wave of technology or monetary interventions.

However, while valuations reflect investor “greed,” other measures better represent the disconnect between the market and fundamental realities.