What's up guys and welcome to wall street millennial with the u.s stock market, reaching record highs a key question on all investors: minds is how sustainable this rally is and are we primed for a major market crash in the response to the pandemic, the federal reserve implemented A historically aggressive policy of money printing which pumped up the value of all assets, including stocks as of april 8th, the spy is at 408 dollars a share more than 20 above the pre-pandemic highs. This is despite the fact that unemployment remains elevated and almost a fifth of independent restaurants have shut down permanently. This seems like a contradiction between the stock market and the economy and has led to many market observers to think the market has been artificially pumped up by the fed. The artificially high prices cannot last forever and may sophisticated investors forcing an epic market crash rivaling the dot-com bubble of 2001.

during the 2001 tech bubble, the s p 500 crashed 45 and didn't fully recover until 2013. More than a decade later, the crash was even more pronounced for technology stocks like cisco, which fell in excess of 80 and have never recovered their tech bubble highs to this day, if we are in another tech bubble now. This is obviously a very scary situation for investors. It's the burst of euphoria.

That typically brings these things to an end and we are seeing it all around us today. Just participate. You've got all the the free traders. You know that what would have been the analog analogous to the day traders of the late 90s that can come in and trade for free they can trade fractionalized stock.

So it's easy for them to. You know put in a little bit of money, look and see that they're up 30 percent. You know that they've made relatively speaking a lot of money for themselves and that's going to keep them participating and so yeah. I think we're very similar to what's going on.

In the 1990s, a lot of new ideas, new technologies, new things come along and they make fabulous revolutions and they and they grow things and that's great um, but there's a tendency of investors to extrapolate the past and get and not pay too much attention to price And when that happens, you start to emerge as somewhat of a bubble by our measures. The bubble is not as what it was in 2000 and not what it was in 1929, but it's kind of like halfway there. If i look at the types of qualities, so-called market experts predict market bubbles all the time, so you can't listen to them blindly in this video we're going to go over the real fundamentals of the market and see if current stock price levels are sustainable. One of the most common ways to determine the market is overvalued, is the price earnings ratio or pe the pe is the price of a stock divided by its earnings per share? If the p e is 10, that means that investors are willing to pay 10 dollars for a stock that produces one dollar of earnings a year.

If the entire market has a high p e. This is indicative of investors being overly optimistic, and the market may be overvalued. Currently, the trailing p e ratio for the s p 500 is 29. This is about the same level as a p e during the height of the tech bubble, which is obviously concerning.

However, the corporate earnings are expected to increase dramatically in 2021 as the economy, reopens and fiscal stimulus causes a surge in consumer spending. If you look at the forward pe, which is the current price divided by 2021, expected earnings, it is only 22.. This is slightly lower than the tech bubble high of 25, but is still very elevated compared to historical averages over long periods of time, the p e ratio of stock markets tend to be mean, reverting when it is too high. This means that investors are overly optimistic and the market will correct lower when it is too low.

Investors are overly pessimistic and the market will correct higher. Another way to look at the market is separating it out to technology stocks. Technology stocks normally have higher pes than the rest of the market because they have strong growth prospects. Currently, the forward pe for tech companies within the s p 500 is 25 and a half.

This is far below the tech bubble highs of 47, but is still elevated compared to normal levels. Mechanically, looking at p e ratios doesn't give the full picture of whether the market is overvalued. Nobel prize winning economist robert schiller argues that corporate earnings are highly cyclical. During economic booms, earnings go up unsustainably as corporations take on more debt, so the p e ratio can look artificially low at the top of the business cycle to adjust for this phenomenon.

He created the cyclically adjusted price to earnings ratio or cape. The cape ratio takes the price of the market and divides it by the average earnings over the past 10 years. This smooths out the cyclicality of earnings and gives a more accurate picture of how much profits companies can make. In normal times.

You have a company, and so price is high relative to earnings. That's a bad sign, but we're clearing out the significant problem of earnings. Is that they're volatile from year to year, so let's average them over some years? That gives a a better indicator of fundamental value, and when john campbell and i studied it, we found that it substantially predicts returns over the next decade, if not tomorrow, but at least over the longer term. Looking at the cape ratio, the market does appear to be significantly overvalued.

The current cape ratio of 37 is below the technical high of 44.. At the same time, it is significantly above the cape ratio of 30 in 1929, which preceded the market crash in great depression. If you believe in robert schiller now would probably be a good time to take some profits off the table. The next issue with markets today has to do with the broader economy, interest rates, inflation worries and concerns over the sustainability of the money.

Printing-Induced economic rally are all foreboding potential pitfalls to the markets. Interest rates are near all-time lows right now, both in the us and worldwide. This has led to extremely easy access to money which investors have used to buy stocks. At the same time as interest rates have gone down, the stock market has been on a pretty much unstoppable trend up for the past few decades, with the exception of a couple bumps in the road, even the likes of the 2008 recession in the 2000 tech bubble.

Don't really stack up against the clearly opposite trends in interest rates and stock prices. The billionaire investor warren buffett famously says that interest rates are like gravity to stock prices, because bonds are an alternative investment to stocks. When interest rates are low, the value of future earnings rises, which in turn raises the value of stocks as ray dalio, another billionaire investor says investing is nothing more than putting up a lump sum of money in return for a future cash flow. So what does that mean for stocks? Can rates keep going down forever so that stocks keep going up forever? We are already starting to see signs.

That rates might not stay as low as they were during the depths of the pandemic. The 10-year yield has already started to rise again seeming to have bottomed right when the pandemic was at its worst, and although jay powell said that the fed will do everything i can to keep interest rates low if inflation picks up like so many economists think must Happen, the fed will have no choice but to raise interest rates. It's all a matter of when and how much will inflation rise in the next year or so billionaire hedge fund manager, ray dalio, explained the inevitability of the fed, eventually raising rates and the resulting downward pressure on stocks. In this recent interview on bloomberg.

Well, as i said, think of the economy as being like an individual and their pulse is dropping when the pulse is dropping. The doctors come running in with the stimulant and they inject stimulant. Now that the economy is rebounding, he's um and inflation pressures are rebounding. Um.

There's not the same pressure to administer that stimulation when it happens when it becomes a problem, is first, the rising interest rates start hurting financial asset prices. First, typically, they hurt bonds. Then they pass through and hurt stocks because still interest rates affect stocks, and when that starts to affect stocks, that's one thing: maybe the stock market can correct 10 or 15 percent, and the federal reserve can tolerate it when it goes beyond that and starts to affect The economy, that's when you see the real trade-off have to search uh sir surface. When talking about market euphoria and insane valuations, we have to talk about the ridiculous valuations given to some newly listed companies.

Take, for example, quantum scape, the next generation ev battery startup. That claims to have made a better mousetrap for electric energy storage take a look at their own financial projections. This is literally from their own analyst presentation. They admit that they won't have any revenue until at least 2024 when they say they'll get just 14 million dollars of revenue, then fast forward, another four years and they're, claiming that their 14 million dollars of revenue were more than 400x to 6.4 billion dollars of revenue.

Even by these insanely generous projections, they won't be free cash flow positive until at least 2027 by their own projections. But despite this lack of profitability or even revenue, quantum scape spiked right after its spat deal, was announced and went out to go up. One thousand two hundred percent within just three to four months to evaluation of 50 billion dollars and then there's nikola run by the wall street laughingstock trevor milton somehow. The manchild was able to trick his way to become the founder of once the most promising competitor to tesla and even got a deal with gm for its electric vehicles.

It wasn't until hindenburg research exposed nicola for one of their promotional videos being their truck just rolling down a hill that the public finally realized. That nicola wasn't all it was cracked up to be and their stock price finally went down. But even today, their stock price took almost a year to bleed out and is still above the stack price of ten dollars. Investors who got in at the beginning would still be up 27 in about a year's time.

Even that beats the s p most years. What do stocks, like quantum scape and nikola, tell us about how eager investors are to bid up stock prices all across the stock market? One argument that bulls often make is that today's high stock market valuations are justified by historically low interest rates, with interest rates on bonds being so low stocks are relatively attractive in comparison, the interest rate on a 10-year government bond is 1.6 currently during the tech bubble. In 2000, the interest rate was in excess of six percent, so, theoretically today's high stock market valuations are much more justified than they were back then, to test this theory, we can look at other countries with low interest rates. The 10-year government bond yield in japan has been below 1 for the past 10 years.

Theoretically, this should cause the japanese stock market to have an insanely high pe over the past decade. The exact opposite is true. During the 10 years from 2011 to 2021, japan's forward p e ratio has hovered around 15, despite the 10-year interest rate being below 1 percent during the same period. Germany's interest rates have also been below one percent, but just like japan, germany's dax p e ratio has hovered around 15..

Every country is different and these examples are not perfectly analogous to the us. However, it does seem to show that low interest rates alone cannot justify high pe multiples. Nobody knows for sure where the market will go in the future or if the current apparent bubble will ever burst. But what we do know for sure is that valuations are extremely stretched by historical standards.

As the great mark twain says, history doesn't repeat itself, but it does rhyme and right now it looks like the market is in a very similar situation to the tech bubble of 1999.