2016 Forecast — First time in a while, I’m Bearish
Recently I’ve had a sinking feeling that things are starting to be overpriced and over inflated. The Big Mac price has steadily went up, and even more importantly my grocery bill has gone up well over 40% over the last few years. Apples that I buy for my daughter (And for me, I eat them also!) used to be 3 for $1.00 are now 2 for $1.00. Bags of Apples, Single Grapefruits and even Sweet Corn during the summer are no longer the bargains they were just a few short years ago.
Everything has went up, but it feels almost as if no catalyst or reasonable explanation has been made to justify these noticeable jumps in prices. My bank account might have been the first place I’ve noticed this but I’ve decided to look around and see if it’s just a new normal or is something about to happen.
First I always look at the chart. Having that TI-82 Graphing Calculator back in the day, that I used to program if/then word games instead of actually doing my math work. In between making the Multiple choice choose your own adventure games I would actually use the graphs to find X. In this case we will use the graphs to look at the real data, real numbers, and see if any type of trend emerges.
This is a chart of the Dow Jones taken from a Google Search today August 5th, 2016
So 5 years ago the S&P was 1199 and this morning it’s 2164? If I had invested more 5 years ago that question mark would be an exclamation point :). That type of growth is phenomenal, but the question is can it be sustainable long term and do we have any past indicators of a sharp drop off in the price of the index.
Lets go Historical and pull out the 20 year chart
I sorted this chart by year so that it makes it easier to distinguish the highs and lows. It appears we have had multiple cycles in the last 20 years where the index rose sharply and then fell sharply. I honestly don’t know if I need to continue writing this instead of logging into my account and trying to figure out how to short everything. Based specifically on the charts it looks like choppy waters are about to happen or we are going to enter into new territory where everything just keeps going up and Apples will be $1.00 each.
Digging deeper one thing I always like to look at when trying to gauge the market is the Shiller PE Ratio. It was developed by Robert Shiller and it is the Price of the S&P divided by the average earnings per share from companies for the previous ten years adjusted for inflation. If inflation fluctuates this can throw this calculation off, but I mean, Apples haven’t change much have they.
Lets look at the data courtesy of Multpl.com
As this value continues to rise we start to enter into the Danger Zone (Pause so you can hum the Top Gun song…. and we’re back). I just wanted to highlight how the number rose, then fell sharply as the markets rose and then fell sharply. Coincidence? Having this information is a little scary. Being right that things will drop means many people, including myself, will take a bath on some serious coin.
I just wanted to point this out and please feel free to let me know your opinions on the matter as we are entering into an uncertain time with the market conditions. Bulls may want to continue to charge into the fog, but unfortunately the maps show a cliff that they may soon fall off.