U.S. Stock Market Valuations Continue to Warn

Mon, Mar 11, 2019 - 10:34am

Originally posted at RecessionAlert.com

We have updated the RecessionALERT Valuation Index (RAVI) forecast models for the SP500 using fourth quarter 2018 data. Stock market valuations continue to pose a “clear and present danger” to positive economic and SP500 returns outcomes and have worsened since our last warning.

One and two year SP500 forecasts continue to offer relatively accurate short-run estimates despite their low overall long-term correlations and both are foretelling mediocre returns (click image for larger view):


To this end, as is tradition, we offer SP500 forecasts to end 2019 as follows, taken from your dashboard, with the understanding that despite relatively surprising accuracy the last 4 times we did this, one-year ahead forecasts can vary significantly from actual outcomes:

Of more concern however is the continued deterioration of the smoothed-RAVI forecasts which are used as market timing signals with three quarter ahead warnings. You can view these on the CHARTS>MACRO>RAVI tab

At this point in time the only major vectors of concern from our universe of models are that over 60 percent of available term-spreads have inverted (bar the 10 year complex) and that valuations are beginning to get close to sounding the alarm.

We would remind you however that recession (and stock market) forecasting is more art than science – if it were that easy, everyone would have seen 2008 coming – and we maintain that a battery of diversified indicators and models need to be monitored and taken into a investment decision making process. Two models in the more than dozen we maintain for clients is likely not robust enough to base investment actions from.

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