As of last week, the Market Climate for stocks was characterised by dangerously high valuations and moderately favorable market action. The price/peak earnings multiple on the S&P 500 is now 21.08, exceeding the peaks of 1929, 1972 and 1987, and revisiting the condition best known as irrational exuberance. The historical norm on prior peak earnings (whether or not earnings were actually at a current peak) is 14. The historical norm on actual record earnings (as is the case today) is 12. The current dividend yield on the S&P 500, despite substantially higher dividends, is just 1.71% (the historical norm is about 4%). When foolishly optimistic assumptions still produce disappointing conclusions, investors should be prepared for bad things to happen.
That's not to say that stocks cannot move higher, but we continue to observe speculative merit without investment merit. Indeed, investment merit is so lacking, and speculative conditions so extremely overbought (the recent, uncorrected spike is beyond belief on a P&F chart), that a vertical decline off of this ''high pole'' shouldn't be ruled out. Patently overbought conditions in patently overvalued markets are the stuff that ruined retirements are made of. Though many investment managers are frantic to ''make their number'' for the year, there's a certain recklessness in taking substantial investment risk here.
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