Column #447      March 22, 2024Highest Equity Valuations in History

There are few things certain in life. Of course death and taxes come to mind. When it comes to markets, other certainties come to mind such as the power of relative values and changing social moods. A flashing yellow light of old says that “Trees don’t grow to the sky.” Then there is “mean reversion” which you’ll never forget after you experience it. It’s an event that totally derails the long-term, buy-and-hold-approach that’s so popular these days.1

Invariably, investors move together like a mob. Their emotions drive them to be less cautious as stock values increase and terrified when their stocks fall in value. The result is that they tend to be overly bullish at the highest prices and extremely bearish at the bottoms. So, it’s notable when investors are exhibiting record behavior one way or the other. The second chart to the right, and the accompanying commentary, is from Steven Hochsberg’s March 14, 2024, “Elliott Wave International Financial Forecast Short Term Update” newsletter (

In yesterday’s Update we discussed the total absence of bearish advisors in the weekly Investors Intelligence Advisors’ Survey ( The chart above shows the other side of the sentiment equation, the bullish percentage. We call these advisors committed bulls because the formula we use—bulls divided by bulls plus bears—excludes those who are calling for a correction. So, the results A Six Year Extreme in The Bullish Percentageshow the percentage of those advisors who resolutely think the market is headed higher versus those that don’t. The last time there were more committed bulls than now was six years ago, in January-February 2018 at the end of wave iii (circle) of 3 in the S&P. It’s a similar picture to the percentage of market bears, where we inverted the scale in yesterday’s STU. The bottom line: the commitment to a continued market rally has reached extremes that have attended past market highs. The decline that started in January 2018 kicked off with a 12% drop in just 9 trading days. A back-and-forth rally-decline sequence thereafter was part of a fourth wave that wound up bottoming over two years later, in March 2020 after the S&P was down 24% from the January 2018 high. All told, the decline from the February 19, 2020 high amounted to 35%.  Steve Hochsberg

Theoretically what happens is that when everyone has bought into the stock market, there’s no one left to buy. Then the “first” sell order to come along starts the trend in the opposite direction. That ends up changing the social mood until it eventually reverses once again when “everyone” has turned bearish and no one is left to sell.

To their credit, the folks at Elliott Wave were advising very strongly to sell stocks and buy bonds in late 2021 and early 2022. That was followed by a strong correction that they labeled as the first wave of a five-wave (down, up, down, up, down) bear market. Now that stocks have bounced higher in the past five months (now in the process of completing wave two up), they are adamantly recommending that investors “sell, sell, sell” all over again for numerous reasons—one of which is that third waves to the downside are usually the longest and most dramatic. They project the coming third wave will bottom out well below the S&P’s October 2022 low of 3489.

Value investing is almost unheard of these days. That’s buying for value such as dividends, assets, and earnings. What people are buying these days is pie in the sky. That’s because they believe stocks always go up. They have been conditioned to even believe that corrections are minor interruptions in perpetually good times and should be bought. Therefore, value is no longer important. Owning stocks is all you need to know. So let’s review today’s values and compare them with historical values for the S&P 500 Index as presented by

The S&P 500 Price to Earnings Ratio is currently 28.43. The historical ranges are:
Mean: 16.06     
Median: 15.00     
Min: 5.31     (Dec 1917 before WW1 and the runup to 1929)
Max: 123.73     (May 2009 when most companies reported loses)

It’s easy to see that for more than 100 years 15 times earnings has been a normal ratio. It’s also interesting to know that during cyclical bottoms such as 1949 and 1980 stocks bottomed with PE ratios of around seven. A PE Ratio change from 28.43 to 7 implies a downside potential of 75.4% without a decline in earnings.3

The S&P 500 Dividend Yield is currently 1.34%. The historical ranges are:
Mean: 4.25%     
Median: 4.22%     
Min:     1.11%    (Feb 2000)
Max:     13.84%   (Jun 1932)

Today’s low yield is comparable to the yield in 2000 that was followed by a five-week, 35% plunge in the S&P 500 index. If the S&P were to drop 68.5% then today’s dividend would be 4.25% of the deflated value. But that’s assuming dividends would not be cut when stocks plunge.4

The S&P 500 Price to Sales Ratio is currently 2.84. The historical ranges are:
Mean: 1.71     
Median: 1.55     
Min: 0.80     (Mar 2009)
Max: 3.04     (Dec 2021)

A change in the price to sales ratio from 2.84 to 1.55 calls for the S&P 500 average to decline 45.4%. If it dropped to the low established during the 2009 deflationary scare that would be a 71.8% drop in the S&P 500 index.5

The S&P 500 Price to Book Value is currently 4.87. The historical ranges are:
Mean: 3.01     
Median: 2.83     
Min: 1.78     (Mar 2009)
Max: 5.06     (Mar 2000)

Since today’s price to book value is nearly as extreme as in 2000, one can’t expect much more pie in the sky. A reversion to the median implies a 41.9% decline in the S&P 500 index which is still a lot higher than the more modest valuation days of 2009. It would take a 63.4% plunge to equal that level.6

Another pictorial chart I like is one that depicts the year-end plots of book values and dividends for more than 100 years of history. There are two axes on Stock Market Valuation Based on S&P Book Values and Dividendsthe chart, one for book value and the other dividend yield. Each dot marks a particular year and in some cases an exceptional outlier month. The most extreme outlier is August 2021 or maybe it’s March 2000. Take your pick. Note that March 2024 is more moderate than the extreme of August 2021 but it’s very near the plots for 2000—a landmark top.

The box in the upper right-hand corner of the chart contains most of the major tops in the past 100 years. Obviously those are unsustainable levels. The box near the bottom middle of the chart is loaded with dots. It’s the “normal” valuation range for the years between 1921 and 1988 with only five outliers. If there will be a mean reversion in the next few years, it may land in this box.

Professional investors always keep an eye on what the Federal Reserve and the Federal Government are doing. When they are both printing and spewing out the paper money, it causes economic bubbles as the private sector revs up with more borrowing and spending of their own. A couple of years ago the Fed started pulling in its horns trying to contain the price inflation it had caused along with the government’s excessive spending during the phony pandemic. Interest rates had started to increase in July 2020 so the Fed FOLLOWED with a higher discount rate and stopped its open market purchases of public and private debt.

But the government continued to spend recklessly and currently the Federal deficit is roaring along at $1 trillion every 100 days. Then late last year the Fed implied it would be lowering interest rates in 2024. In response the stock market popped higher and the dollar fell. But the Fed only talks about lowering the discount rate because price inflation continues while the government borrows and spends. In response to the Fed saying it “will” lower rates soon while the government spends itself into oblivion, some stocks, gold, and Bitcoin have soared to new highs as people around the world jettisoned their dollars.

This puts the Fed in a pickle. One of its tasks is to defend the dollar. Over the long term it has failed miserably at that task, even though off and on it has made feeble short-term attempts to support it. Because of the potential for a run on the dollar, it’s not likely we’ll see the Fed become more stimulative anytime between now and the election. If that’s so, there’s plenty of room for disappointment in the stock market if investors start looking for value rather than continue buying stocks no matter what they cost.7

With worry-free, risk-free, three-month Treasury Bills yielding about 5.5%, they are better holdings than are stocks that have near-term downside risks of anywhere from 50% to 80%. Especially in light of my opening remarks about investors being overly optimistic at record extremes right now, the timing for switching out of stocks into Treasury Bills might not be better.

Strangely, FOMO (fear of missing out) is a disease as crippling to investors as the Trump Derangement Syndrome is for voters. People with long-term positions in the market can’t conceive of what it’s like to be caught in a long-term cyclical contraction of epic proportions—yet it’s a historical fact that they come along every so often.8

Keep in mind the long-cycles of social moods. The last great deflation (unwinding of debt) occurred from 1929 to 1932. Since then we’ve had more than 90 years of rising market action interrupted every so often by years-long corrections. After the S&P 500 peaked in 1929 it took 25 years to exceed that peak. After it peaked in 1969 peak it took 12 years to make a new high. After it peaked in 2000 it took 13 years before making a new high.

But now it’s possible that following the CONSTANT DOLLAR peak in November 2021 we may enter a stock market correction that corrects not just part of the last upswing from 2009, but is a mean reversion for the entire move that commenced in 1932. That’s something to think about. That means in constant dollars we may not see stock prices as richly valued, as they are now, in decades to come.9

How all this unfolds over the next some odd years is something like trying to figure out the second coming of Christ. All we can do is evaluate our current conditions, measure the risks, and take up positions that best fit our future goals with the least amount of stress. In my book, staying the course and expecting more good times to be piled on the good times we’ve had in a country that is as divided and in debt as it is—is expecting miracles. While on the other hand, if sanity sets in people might start seeking value. In that case of a change in social mood, there will be a very natural mean reversion—no miracles needed.

To your health.

Ted Slanker

Ted Slanker has been reporting on the fundamentals of nutritional research in publications, television and radio appearances, and at conferences since 1999. He condenses complex studies into the basics required for health and well-being. His eBook, The Real Diet of Man, is available online.

For additional reading:

1. What Is Mean Reversion, and How Do Investors Use It? by James Chen from Investopedia

2. Elliott Wave International

3. S&P 500 Price to Earnings Ratio

4. S&P 500 Dividend Yield

5. S&P 500 Price to Sales Ratio

6. S&P 500 Price to Book Value

7. The 5 Most Important Lessons From the 1929 Crash That Matter Today by Mark Kolakowski

8. Trump Derangement Syndrome from Wikipedia

9. S&P 500 Index - 90 Year Historical Chart