US stock charts mirror the 1930s

Before the Iraq war started one reader sent me charts showing how the US markets always bottomed out before a major conflict. I ignored it.

Now last week another reader sent me a chart showing that the US stock market over the past decade almost precisely mirrors chart before the depression of the 1930s. Should I ignore it?

Let us be quite certain about this: the chart of the US stock market from the mid-1920s to early 1930s is almost a mirror image of that seen from the mid-1990s to date.

We saw a steep surge in stock prices over the whole of the late 1990s culminating in the Millennium peak in 2000, then a very sharp sell off, and a rally to recover 50% of that sell-off; and that is where we stand today.

For those with short memories, and even my mother was a little girl at that time, in 1932 the US stock market fell off a cliff and shares declined to around 10% of their peak value.

But aren't shares fairly priced today? Not so if you look at the cyclically adjusted price-to-earnings ratio of the S&P 500. This stands at 26 compared with the long term average of 16. Indeed it has only been higher twice before in its history, in 2000 and 1929. This does not look good news.

Could history repeat itself, as so often happens? There has only been one bull market as strong as the one of the 1990s and that was the 1920s. Ipso facto what goes up has to go down.

If that is the case then why is the market so high right now? The easy answer is that high interest rates have encouraged the buying of any asset that offers a better return than miserably low interest rates on bank accounts. Thus overvaluation has been compounded to bubble proportions.

Now, it may all be different this time. But just to be on the safe side holders of US equities might like to consider reducing their portfolios or going into cash for a while.