Can This "Expensive" U.S. Stock Market Get More Expensive? YES... - stories expensive

From time to time, investors trot out the old trope that the U.S. stock market is expensive. At today's valuations, they say, we can't possibly buy equities. 

Given the recent rally to all-time highs, this is a narrative that's getting passed around a lot lately. Here are just a few of the recent headlines from Old Wall media.

Even billionaire tech luminary Bill Gates chimed in telling CNBC, "As Dow approaches 20K in Trump rally, stocks are expensive." 

The problem with each of these stories about expensive stocks is that they were written about thirty days after Election Day. The Dow was then flirting with 20,000. Since then, U.S. stock market indices have become significanly more expensive.

SO U.S. STOCKS ARE EXPENSIVE, NOW WHAT?

It's true. At 21.8 times trailing twelve month earnings, stocks aren't cheap by historical standards. Indeed, as you can see in the Chart of the Day below, in the past 30 years, stocks have only been more expensive in the lead up to The Great Recession and the Dot Com bubble and following the shallow recession of 1991 during the presidency of George H.W. Bush.

So stocks are expensive. Thinking about it another way though, the chart also shows U.S. stocks can absolutely get more expensive.

How? Recent market moves are supported by strong economic data. Year-over-year growth in both retail sales and inflation are near or above 5-year highs

  • Retail Sales: The year-over-year growth rate in retail sales hit 5.6% yesterday, a level not seen since March 2012. Digging deeper into the report, the retail sales “control group” (a good proxy for the input into the consumption component of US GDP) accelerated to +4.0% year-over-year growth for the month of January versus +3.4% growth in December.
  • Consumer Price Inflation: Core inflation just hit the highest level in 5 years. CPI accelerated to +2.5% year-over-year in January versus +2.1% in December. Inflation has now accelerated for the 6th consecutive month.

This strength follows a broad swath of economic indicators that are also accelerating. Meanwhile, S&P 500 company earnings are growing once again too.

Can This "Expensive" U.S. Stock Market Get More Expensive? YES... - 02.27.17 EL Chart

Bottom Line

The U.S. economy growing. That's a catalyst that could help make an already "expensive" stock market that much more expensive.