OECD warns of disconnect between stock market and economy
A majority of BNN viewers who responded to BNN’s web question of the day agree with the OECD that the valuation accorded stocks has gotten ahead of the fundamentals.
While investor sentiment polls suggest many investors remain bullish, it’s tough to argue that stocks aren’t priced quite dearly.
According to Factset, the S&P 500 is currently trading at a price-to-earnings multiple of 18X 2018 profits.
That’s not cheap, especially if you believe Federal Reserve Chair Janet Yellen’s words that the U.S. central bank will be hiking interest rates three times per year during the 2017-19 period. Insiders sure think so!
The orange line on the right vertical axis in the above graph shows the rolling eight-week average of sales of shares by insiders of companies listed on the New York Stock Exchange divided into the number of share purchases made. This ratio currently sits at 5.98:1. Just looking at the data for last week, according to Vickers Stock Research, this ratio reached an eye-popping 11:1 ratio, 3.5 standard deviations higher than the mean.
Remember that often-used phrase, ‘Actions speak louder than words’; insiders are certainly voting with their feet. And why shouldn’t they? The graph below shows how the rising stock markets (white line, right axis) has made investors incredibly complacent, as shown by the falling VIX index, often referred to as a gauge of fear.
So should we really stand up and take notice when the OECD suggests stocks are getting expensive? Not really, the evidence is obvious and right in front of our eyes.