Holiday Chart Pack: Powell Gives Investors Coal For Christmas

We review the current interest rate regime, slowing economy and the potential for challenging financial conditions as the Fed tightens into economic weakness. Buckle up.

Relevant Past Articles:

• The Everything Bubble: Markets At A Crossroads

• Not Your Average Recession: Unwinding The Largest Financial Bubble In History

• Key Bitcoin And Equity Dynamics To Watch Right Now

• Take A Hike: Fed Lags Miles Behind The Curve On FOMC Eve

Note: Much of today’s commentary will be centered around a chart breakdown from the fantastic website www.currentmarketvaluation.com, a great resource for readers.

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The State of Equity Markets

In today’s equity market valuation analysis, we will cover a few separate economic models and frameworks investors can use to evaluate the attractiveness of the equities market. To begin with, It’s important to remember that the very structure of the current monetary system means that on a long enough timeframe, upwards trends in productivity numbers and equities are a result of the compounding effects of inflation. Nominal gross domestic product and total U.S. equity market capitalization over the decades have been quite literally “up only”. Yes, this does include massive productivity enhancements, but the effect of inflation often masks the real returns that equities offer over decades of time. 

As a percentage of GDP, equity market values since the 1950s are in a general upwards trend, which can be attributed to a variety of factors including globalization, the industrialization of much of the developing world, and greater financialization of the economy.

Often referred to as the Buffet Indicator, equity markets still look historically overvalued relative to the output produced by the U.S. economy, and with a recession on the horizon, further equity weakness could be on the way.

In particular, looking at this drawdown relative to those of the past, the current rise in U.S. Treasury yields as equity markets have deflated offers a much different picture relative to compared to previous drawdowns. The closest comparison is the 1970s, which saw equities drawdown in real terms (relative to nominal gross domestic product).

We can also look at things like margin debt and its year-over-year change to understand the cyclical nature of equity market cycles. In real and nominal terms, we've seen the biggest year-over-year change in margin debt ever, with tech darlings like Tesla taking a massive hit recently.