October has been a terrible month for equities. Yet, this is only a start of what’s to come.
Decline Barely Started
Despite the rout, the S&P is just barely down for the year.
Expect a “Lost Decade”
The Shiller PE Ratio also known as “CAPE”, the Cyclically Adjusted Price-Earnings Ratio, is in the stratosphere. It’s not a timing mechanism, rather it’s a warning mechanism.
The main idea is that earnings are mean reverting.
On that basis, stocks are more overvalued than any time other than the DotCom era.
But that is misleading. In 2000 there were many sectors that were extremely cheap. Energy was a standout buy then. So were retail and financials.
It’s difficult to find any undervalued sectors now other than gold.
Financial Crisis Coming