While I was thinking today about the currently overvalued situation of the US stock market, something interesting came in my mind.
Every news agency is found to report about the Trump rally. That investors are bullish anticipating Trump cutting taxes and will take pro-business steps. Everyone seems to be euphoric about Trump. The media is headlining about the Trump rally and how he is good for business in America.
But before the election, most media said that the stock market will crash if Trump becomes the president of United States. But now every opinion changed all of a sudden. Investors are betting big on Trump, media is showing pro-business policies of Trump.
No one seems to be taking that due to Trump policies, the American Stock market might crash. But before the election, everyone talked about the eminent crash if Trump won the presidential election.
This leads me to an important conclusion that the stock market has a short-term memory.
Even Warren Buffet bought 12 billion dollar worth of stock after Trump became the president.
The Indian markets rallied too. After a correction, NIFTY 50 bounced back from 8000 levels. Demonetization seems to have no effect on the earnings.
But the real question is, is this widespread bullishness sustainable?
Brexit happened many months ago. But Brexit didn’t happen then. The real Brexit is happening now. Now is the time to be nervous about Brexit. But no one seems to be talking about it. But everyone seemed nervous about the vote. This also proves my point that the stock market has a very short memory.
While I cannot say exactly that the stocks will not further rally, but one thing I can say that this boom will eventually burst. Nearly all the worldwide stock markets are overvalued. There were no imminent crashes since 2008. Most crashes happen in Cycles. Mostly in the time frame of 5-8 years. The federal reserve did everything to save the US economy but it has actually inflated it.
As of 16 th May 2017, the P/E of NIFTY is 24.16. Let us look at the returns over a period of 3 years given by NIFTY on various P/E ratios:
This euphoria can continue to take the P/E ratio of NIFTY higher. But it should come down as is eminent from the historic returns.