Market extremes - The problem with historical comparisons when interpreting markets is they can be useless for a long time - until suddenly they explain everything. As the S&P 500 briefly touched 1900 this week its capitalisation overtook the annual output of the US economy. The ratio of market cap to output now lies squarely between 92 and 125 per cent, the cyclical peaks of 2000 and 2007 respectively. Those worrying about the current rally also point to Shiller’s cyclically adjusted price to earnings multiple at 25 times - well above the long-term average of 17. The trouble is that the last two times the CAPE crossed 25 (in 1996 and 2003) the bull market was just getting started and ran for another four years. Similar 'extreme but may go extremer' arguments exist for volatility, eurozone periphery sovereign yields, high-yield corporate bond spreads and more.
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