Friday, 2 January 2015

The U.S. Stock Market Risk Indicator, December 2014

The U.S. Stock Market Risk Indicator, which combines insights from the schools of value investing and Austrian economics, remained near record highs at the close of 2014. The higher the reading, the poorer the outlook for future stock market returns. The indicator therefore continues to signal future stock market returns that will be poor at best. In fact, if history is any guide, the indicator is flashing red and predicting a significant stock market correction in the not too distant future. 

Both the components based on value investing and Austrian economics have helped push the risk indicator to current record highs. The value investing indicator has now surpassed the previous high from April 2007. 

Meanwhile, the indicator based on some of the insights from Austrian economics remains among the highest ever recorded, though it has declined somewhat during the last year or so. This decline suggests the stock market is receiving less help from some of the broader economics-based components and is increasingly being driven by a rise in market valuation metrics such as the price-earnings ratio. 

Suggested reading:

The Artificial U.S. Economic Recovery: QE is Finally Showing Up Directly in Bank Lending

Also see: 

Lessons Worth Remembering: Who Predicted the Bubble? Who Predicted the Crash?