Pandemic Market Valuations

By Dean Barber

June 10, 2021

Pandemic Market Valuations

Key Points – Pandemic Market Valuations:

  • Understanding Market Valuations Before and After the Pandemic
  • Where Are We Today?
  • The Pandemic Economy Then & Now
  • The Fall and Comeback of The Bond Market
  • 17 minute read | 37 minutes to listen

Stock market valuations hit an all-time high in January of 2000. That is until now. Today’s valuations exceed where they were before the Dot Com Bubble. Join Dean Barber and Bud Kasper as they discuss the overvalued markets, whether or not they are sustainable, and pre and post-pandemic market valuations.


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Article: The Pandemic Economy Then and Now

Pandemic Market Valuations

Dean Barber: Thanks so much for joining us here on America’s wealth management show. I’m your host Dean Barber, along with Bud Kasper. And Bud, I’ve been getting a question an awful lot lately, “Are these markets overvalued? And if they are, when’s the crash? When’s this thing coming to an end? When’s the party going to be over?”

“How bad do you think this really is going to be?”

Bud Kasper: Yeah, Well, I think it depends on what measurement you want to look at and which one is your favorite from that perspective. When you think about what we just went through, Dean, with the COVID-19 case, and boy wasn’t that historic, and when you look at that, that was one of the worst health events in history, bar SARS, or MERS, or Ebola, or even the Spanish flu, was unbelievable.

I might even add a story to that as well, Dean. One of my clients happens to be the head epidemiologist at a major university whose laboratory worked directly with Moderna in the vaccine. And I made a call to him. I think it was around February 25th last year, and I asked him, “How bad do you think this really is going to be?” He said, “Bud, preliminarily, at this stage, I think it’s going to be one of the worst.” And sure enough, that turned out to be true.

Fortunately, we’ve handled that through the warp speed that president Trump put in place, with the pharmaceutical companies to produce this. It’s amazing what America has done for that.

Markets Reacted Poorly to the Pandemic, Until…

Dean Barber: There’s no question, Bud, and I think that when we first ran into the pandemic, the markets obviously reacted horribly. It wasn’t just the stock market; it was parts of the bond market as well, and the real estate market. Then the stimulus packages came in, and it was a game-changer. It was a game-changer, and it turned everything around.

Now, if you want to understand the pandemic and the economy pre-pandemic and the economy today, I want to encourage you to check out Shane Barber’s latest article, The Pandemic Economy Then and Now.

Shane is very detailed on what the economy looked like pre-pandemic and what the economy looks like today.

Understanding Market Valuations Before and After the Pandemic

To understand equity valuations and the stock market’s valuations, first, we need to set the stage for what’s going on in the economy. Can these markets be supported? 

I want you to understand something. If you are near retirement, it’s critical to take the assumed withdrawals from the portfolio you have today and pretend it’s January 1, 2000. Imagine you’re starting your retirement journey then.

Because when we look at valuations on the markets today, it’s at the very tail end of this paper, again at, that we get into the market valuation. 

Figure 1 | Source: Advisor Perspectives

So, I’m going to go back from a historical perspective in Figure 1. We look at the Crestmont P/E, the cyclical P/E, Tobin’s Q ratio, and then we look at the S&P 500 Composite from its regression. And what we do is we average those four together. And before the 1929 market crash, the average of those four had the markets 83% overvalued. They never even came close to being 83% overvalued again until the mid-1990s. It was actually about 1993, 1994, right in that range, whenever those valuations got that high again.

What Happened in the ’90s?

Now you remember what was going on in the late ’90s, Bud.

Bud Kasper: Yeah, Technology.

Dean Barber: Technology, Dot Com Bubble, and Alan Greenspan’s “irrational exuberance.”

Bud Kasper: I tell this story often.

Dean Barber: All of a sudden, the valuations, as measured by the average of these four valuations, eclipsed the overvaluation that caused the Great Depression. Okay?

They kept on climbing, kept on climbing, and kept on climbing until January 1st of 2000; those valuations were 163% above what they call the mean or fair value.

Bud Kasper: Almost double what it was.

Dean Barber: Almost double what it was in the Great Depression. Now, when the Dot Com Bubble burst, those valuations came back down to be only about 40% overvalued. They never got back to the mean.

Bud Kasper: Yeah.

Dean Barber: It wasn’t until 2008 that when those valuations were 72% overvalued, they crashed down where they were 8% undervalued. 

Where Are We Today?

Okay, now, does anybody have a guess where we’d be today?

Bud Kasper: I don’t.

Dean Barber: Yeah, 221% overvalued.

Bud Kasper: Oh gosh.

Dean Barber: Never been in this spot before.

Bud Kasper: Why is it different this time?

Dean Barber: It’s very different this time, Bud, because of the massive stimulus and the additional stimulus that’s still coming, and the additional treasury purchases that the government’s making today, bringing our interest rates on the 10-year treasury, as we speak here today below 1.5% again, even after they had hit 1.77% earlier this year, over the fear of inflation.

My point is this: this is no time to sit back and relax and say, “look how great things are.” Yes, we’re in a post-pandemic or almost post-pandemic economy. But you need to understand what you own today and how it would perform if we were to go through another Dot Com Bubble with valuations where they were back then – because the valuations are higher today.

Are Markets Overvalued?

Figure 1 | Source: Advisor Perspectives

Dean Barber:  The question that we have coming at us quite often in the last several weeks is, are the markets overvalued? And the answer is unequivocal yes, they are overvalued. Looking at Figure 1 again and the average the Crestmont P/E, the cyclical P/E or the CAPE ratio, Tobin’s Q ratio, and the S&P Composite from its regression. In that case, the markets are 221% overvalued, which eclipses the 163% overvaluation that occurred during the Dot Com Bubble.

So yes, markets are overvalued. But remember, in the last segment, we talked about how the peak in valuations prior to the Dot Com Bubble was the Great Depression. It was 1929, where markets using an average of those four were 83% overvalued. So, they continued in the run-up to the Dot Com Bubble and doubled the overvaluation from a historical perspective.

Alan Greenspan talked about the irrational exuberance and all the other things that were going on. And it also had people, Bud, saying, “Look, it’s different this time.”

Bud Kasper: Yes, they did.

Dean Barber: Okay? And then what happened? 2000. Boom, the bubble bursts in ’01, ’02.

Bud Kasper: 46% in three years.

Dean Barber: 46% decline, and it was a slow bleed.

Bud Kasper: Now, here’s the crazy thing with that, Dean. As the market was falling, bonds were the best place to be during that time.

Dean Barber: Well, and real estate was still solid then too.

The Pandemic Economy Then & Now

Dean Barber: So, I want to go back and, again, encourage you to read the latest article written by Shane Barber, The Pandemic Economy Then and Now. He’s one of the partners here at Modern Wealth Management, and in his article, he outlines nine key sectors of the markets and where they are today versus where they were pre-pandemic. He includes graphs and charts that make this even more powerful. 

  • Hotels are still 15.2% below where it was pre-pandemic. 
  • Airlines are still 12.6% below where they were pre-pandemic 
  • The energy sector is still 1.4% below where it was pre-pandemic
  • Leisure and entertainment is now 4.8% above where it was pre-pandemic
  • Consumer staples 10.9% above where it was pre-pandemic

The one that is out of sight, which is where you ought to be paying attention to, retail, that sector is 105.8% above where it was pre-pandemic.

Bud Kasper: Right.

Dean Barber: That’s amazing.

Bud Kasper: There’s a lot of online shopping, isn’t there?

Dean Barber: Well, retail fell by nearly 40% in that first call it six weeks of the pandemic. Yet, today it’s 105% above pre-pandemic levels.

Savings Rates and Inflation

Bud Kasper: Yet one of the byproducts was the savings rate increased during that period. So, we have had people that are redoing their homes and things like that because they haven’t been able to go out and spend it anywhere else, and they say, “Well, I might as well internalize this money and use it to improve my property.”

Dean Barber: Then, as it’s happened, supply chains got messed up. You see that they’re still messed up. Lumber prices went through the roof. Now, you’ll note here, and we’re working on another article to lay this all out for you and, Bud, I didn’t tell you this before the show, but Shane and I were talking about this here this week, copper, lumber, steel, there’re a few other commodities that all hit their peak on May 5th. And they’re all now down anywhere between 10% and 20% from where they peaked out on May 5th.

Bud Kasper: That’s still high.

Dean Barber: There’s no question that they’re still high, but if you think about that, Bud, that coincides with the Fed’s assertion that the inflation will be transitory and that most of the rapid rise in costs will probably peak out in the summertime and begin to taper off.

It also kind of tells us why we’ve seen that 10-year Treasury that peaked out in mid-May at 1.77% now fall back down below 1.5%.

Bud Kasper: And how many people thought, Dean, that it would go to 2% or 2.25%, which would put more pressure on stocks because yields were increasing?

Dean Barber: Right. And think about all the people that said, “I got to ditch these bonds,” here in early May, “because, boy, these interest rates are just going to go up.”

The Fall and Comeback of The Bond Market

Bud Kasper: But we had such an incredible bond market the year before. That was a disaster, along with all this happening with the stock market at that time. If you recall, all bonds, I don’t care if they were treasuries, mortgage-backed, bank loans, or whatever the case may be, most of those fell by as much as 40% from right around February 23rd through March 23rd, If it wasn’t for Jerome Powell stepping in on March 23rd, I don’t know why these dates stick in my mind and said-

Dean Barber: Well, because, Bud, it was pure panic.

Bud Kasper: Yeah.

Dean Barber: Okay? You and I have been doing this long enough that the ’87 market crash burned in our memory. The Dot Com Bubble is burned into our memory. The ’08 financial crisis is. And so now we’ve got the COVID-19 2020 “flash crash,” if you will. It was unprecedented, so that’s why it’s burned into your memory.

Bud Kasper: Yeah, no doubt. But, I mean, most people get confused by this, and yours truly included, because here we had bonds dropping simultaneously to stocks. Well, we have circuit breakers for the stock market. We don’t have circuit breakers in the bond market except for the Fed chairman.

Dean Barber: Right.

The Fed Will Be The Buyer of Last Resort

Bud Kasper: He stepped in and said, “The Federal Reserve is now going to be the buyer of last resort of any kind of bond.”

Dean Barber: Right. We’ll just give a quick lesson on how the bond market works. 

So, the bond market’s like a good old boy’s trading network. Okay? I got a bond I want to sell. Here, I’m going to put it up for bid. Anybody wants to make me an offer. I’ll take the best offer.

Bud Kasper: And people are always looking for income.

Dean Barber: That’s right. And so typically, a bond goes out for bid, and there’ll be half a dozen offers within minutes.

Bud Kasper: Easily.

Dean Barber: Well, there was such a mass liquidation taking place from some of the huge hedge funds that we saw two to three bonds out for bid for every offer out there. So, what happens if you’ve got too many people trying to sell something and not enough buyers? Well, those buyers are going to start bidding ultra-low prices.

So, that’s what happened, and so it became a self-fulfilling prophecy. And then all companies that do the bond valuations value bonds en masse, and so they’ll look at a sector of bonds and say, “Well, gosh. Look at all these that have traded down here. They must all be worth that.” And so they just come in, and they value these things way below the fair market value of these bonds. Now, most of those finished the year well, up by 2% to 5% or something like that.

Bud Kasper:  14% in some cases if you had government bonds.

Dean Barber: But the point is even those that were down by 30%, 40% came back.

The Power of the Consumer

Dean Barber: That’s the exciting thing about bonds, and we don’t want to get too much into just the mechanics of the markets, but people must understand this. I want to encourage you to get out to our podcast that we do. It’s called The Guided Retirement Show™. We interview David Mitchell of AllianceBernstein, talking about overvalued markets. Be sure to check out episode 43 of The Guided Retirement Show. You can also find that on your favorite podcast app.

At any rate, the show’s about you. It’s about you, the consumer, and making intelligent and informed decisions. Where we are right now, it’s critical that you step back and take whatever you own today and stress test it through the Dot Com Bubble, withdrawals, and everything.

Today’s Job Market

Bud Kasper: You know, Dean, let’s talk about something for just a moment. I think it’s something that people are having a hard time getting their arms around, which is the jobs report. When we looked at the job openings in April, 9.3 million available positions, that’s a pretty darn large number available for people to go out and get jobs, and yet so many aren’t. And why is that? The answer because the government has enabled them not to through government programs.

Dean Barber: Right.

Bud Kasper: Which is not productive to America.

Dean Barber: I think this is one of the failures about how the pandemic was handled. Are there people who can’t get a job because of their profession or economy today and the effects of the pandemic had done? Yes. So, those specific sectors should be where the help is going, but it’s in mass. 

Unemployment Payments

Your point is that there was an additional $600 per week of federal unemployment on top of state unemployment. That ended. Then we got round two, $300 per week in federal unemployment on top of state unemployment.

So people are saying, “You know what? With that much money, I’m making more doing nothing than if I went back to the job that I was at. So I’ll wait until September when that $300 runs out.” 

There are now 25 States, Bud, including Missouri, that have said, “You know what? We’re done. We’ve got all these job openings, and people won’t come to work because they are on the government dole.” 

Bud Kasper: What kind of commentary is that on America?

Dean Barber: It’s ridiculous.

Bud Kasper: And by the way, today, Saturday is when four the States, including Missouri, are saying no more.

Dean Barber: Yes. 

Bud Kasper: Yeah, so think about that; it only makes sense. Why do we keep putting this debt burden on our country and our states through these programs? At some point, you’ve got to step up and say, “Hey, I’m a citizen. Get me a job.”

Today’s Workforce Compared to the Past

Dean Barber: Well, when you look at, and we’ve talked about this before, the labor force participation rate. If we go back into, let’s say, like 1999, the labor force participation rate was 80%. So, in other words, 80% of people eligible to work, this was between 25 and 64, were participating in the labor force.

Bud Kasper: Right. We’re working.

Dean Barber: Right. Today that’s 77%.

Bud Kasper:  Yes.

Dean Barber: Okay. And it’s declining. That’s the crazy thing.

Bud Kasper: It is indeed. But again, it goes right back to cause and effect. The cause is that the government will give you money rather than have to work for it, and that’s such an anti-American status. It’s just unbelievable to think about.

Dean Barber: We started to see an increase in that labor force participation rate, Bud, back in about 2016, and it ran through the end of 2020 where we saw that labor force participation rates start to increase for the first time since 2000.

Will the Job Market Impact Market Valuations After the Pandemic Relief Ends?

So could that, Bud, mean that there is indeed a pent-up demand for the American consumer, and could that mean that once all these unemployment benefits from the federal government go away, all these people go back to work? 

Is it possible that the overvalued market will see valuations start to come down? Not because the stock prices are falling, but can they come down because the earnings of these companies will increase?

Bud Kasper: Yes, and very much true. That very well could be a true statement.

Dean Barber: It might. 

Bud Kasper: Yes

Dean Barber: Okay. What if we have COVID 2.0?

Bud Kasper: Well, if that’s the case, then bets are off.

Consumer Confidence

Dean Barber: I mean, the lofty valuations are scary. Now, if we look at Consumer Confidence Index, we are well above where we were kind of even right pre-pandemic. And so things look pretty good from that. And from the national NFIB’s Small Business Optimism Index, that’s high. Disposable income and personal consumption are both increasing. 

And this is the one that I think everybody kind of forgets about. And if you think about what drives our economy forward, Bud, it is the American consumer. It’s what you and I and everybody in America do daily that moves our economy. 

Consumer spending is a full 70% of our gross domestic product. So GDP, 70% of every dollar that is spent, is done by the consumer. And yet, the jokers in Washington, DC, would have you believe that it’s them that makes everything grow. And all they do is mess it up.

Bud Kasper: Yeah, they do. If we haven’t learned anything, we can’t keep throwing money at a problem and think it’s going to cure itself automatically. It just doesn’t work that way. There has to be constructiveness underneath that.

Dean Barber: I encourage you to read the article authored by Shane Barber, one of the partners here at Modern Wealth Management, The Pandemic Economy Then and Now.

There’s no more time more critical. If we go back to ’07 when we were talking about things, I think this is as critical now as it was then.

Bud Kasper: I agree.

What Comes Up, Must Come Down

Dean Barber: The market valuations have to come down at some point. There are only two ways that valuations come down, either earnings increase rapidly, or stock prices drop.

Bud Kasper: Yes. When you go back to that 2000, 01, and 02, that 46% decline in the S&P 500 during that specific timeframe and look at what happened in the five years, 95, 96, 97, 98, 99, all double-digit returns in the S&P 500. Every mother’s son and daughter were putting money into the stock market because why? Because we had this new thing out called technology. 

This meant the productivity of the United States and the world, for that matter, was fantastic with one problem. No earnings. Everybody understood what the technology could be, and they were bidding the price up on these stocks beyond any normal valuations, and so when they disappointed because they didn’t have those earnings yet, then what did we do? We had the dot com bubble, and we had a 46% retracement in the market.

Dean Barber: And technology was down by over 70% then.

Bud Kasper: At that time. Pretty close.

Dean Barber: So the point is this. If you are just kind of saying, “Well, things look pretty good, they feel good, and I’m so good.” 

Bud Kasper: “I’m saving money.”

Stress Test Your Portfolio

Dean Barber: I mean, look, take what you own today. And we can do this for you. Take what you own today and recreate it. Take it back to the Dot Com Bubble and say that that was the day that you retired and try to take withdrawals and see how long your money lasts the way that it’s positioned today. 

See, when we use our Guided Retirement System™, we take your portfolio how it’s constructed now and stress test it. We’ll stress test it through the dot com bubble, through the ’08 financial crisis, and you’ll be able to see: “If I had my money like this and this was my date of retirement, what would have happened?”

Bud Kasper: “What were the results?”

Dean Barber: “Would I be okay? Could I continue to have the lifestyle that I wanted, or would I have to make some significant sacrifices and not have the retirement that I want?”

There is No Crystal Ball

Look, there’s no such thing as a person or an individual that can time the market. There’s no such thing as a crystal ball that can tell you exactly where you should be 100% of the time. But there is such a thing as creating a well-thought-out and constructed financial plan.

A plan can show you from a historical perspective what type of portfolio you should be developing and what you should be holding in times like this to give you the highest probability of success. 

Again, Bud, you say this all the time, history doesn’t repeat itself, but often it rhymes. So we use history as a guide to help us understand when valuations get the way they are now from a historical perspective, what happened.

Bud Kasper: Right. And history is all we have. Certainly, there are new measurements, and we’ve brought up the attention of a lot of those today. 

Dean Barber: Get the article that we’re talking about today. It’s The Pandemic Economy Then and Now.

Where is Manufacturing Today?

With the valuations where they are today, we want to look at a lot of things. One of them that we want to look at as a forward-looking indicator is the US Manufacturing Purchasing Managers Index. Okay? So this is telling us what’s happening out there in the manufacturing economy and that Purchasing Managers Index Bud is 10% above where it was pre-pandemic. 

Bud Kasper: Really? Okay.

Dean Barber: Yeah. Okay. So now that tells us something’s happening.

Bud Kasper: It does. And it also tells I think everybody is stunned that when we’re looking at real estate as an example, the people are going in and bidding on houses 10% above the ask. 

Dean Barber: Or more.

Bud Kasper: Yes. Just to make sure that they have the opportunity to be able to beat out whoever else is bidding on the house. When you look at lumber prices, paint is now elevating as well. Why is this happening? Well, generally, it happens because it’s in short supply, therefore- 

Dean Barber: It’s happening because my wife thought it was time to remodel.

Supply During the Pandemic

Bud Kasper: Great, great timing. Nonetheless, you look at that, and as we talked about earlier, people have saved money during the pandemic because they couldn’t go out and do anything, and now we’re getting the other side of the coin in that we’re doing things, but it’s more expensive to do them. 

Dean Barber: So what other indicators are ahead of where they were pre-pandemic? The Empire Manufacturing Index, the Philly Fed Index, the Richmond Fed Index, the KC Fed Index, and the Dallas Fed Index all above pre-pandemic levels. We look at ISM services, a monthly series with ISM Services Index. That is above where it was pre-pandemic. It’s the highest that it’s been going back into the 2000s.

Bud Kasper: As you’re reading these things off, I know there’s a lot of people listening saying, “I don’t know what he’s talking about.” He’s giving me all these names. And remember this. This article that we’re reading off of was written by one of the partners at Modern Wealth Management, Shane Barber, and it has explanations of all that we’re talking about. We’re doing the best job we can with this, but I highly encourage you to read The Pandemic Economy Then and Now.

And the Economic Indicators Say…

Dean Barber:  The point is that many economic indicators that we look at Bud are pointing towards sustained economic growth. If you have sustained economic growth, that doesn’t mean bear market territory today just because market valuations are high. 

What that means is that you have time to prepare for valuations to come down. And again, valuations come down in one of two ways. Either stock prices fall or earnings increase. You have to be paying attention to it. This isn’t a guessing game. This isn’t a just buy, hold, and hope type of strategy. That’s not what you do, especially those of you- 

Bud Kasper: In retirement.

Dean Barber: -that are in retirement or within five to ten years of retirement.

Bud Kasper: Yes, sir.

Don’t Get Lazy

Dean Barber: Get a glimpse of our Guided Retirement System™. So Bud, the takeaway here, interest rates are low, market valuations are high, stimulus continues, treasury buying continues, there’s no talk of tapering. And so we’re going into summertime. Typically it’s a wonky time of year for the markets. 

Bud Kasper: Malaise. Yeah.

Dean Barber: But now these valuations are, and you and I have said this off the air, they’re frightening. There’s zero question that you can’t look at the chart we’re looking at and not have some concern. 

Bud Kasper: Yeah. And I think the biggest takeaway that people should have from this is that we’ve tried our best to make this an educational program week after week, with different topics related to the financial structure. 

Dean Barber: We can help guide you through time like this to provide you clarity confidence and control in your retirement. Schedule a complimentary consultation with a CFP® below to find out how we can help you. Remember, you can get America’s Wealth Management Show and our podcast called The Guided Retirement Show™. Look for The Guided Retirement Show™ and America’s Wealth Management Show, and subscribe to both of those on your favorite podcast app. 

We appreciate you joining us here. I’m Dean Barber, along with Bud Kasper. We’ll be back with you next week, same time, same place.

As always, you can experience our Guided Retirement System™ by clicking here to schedule a complimentary consultation.

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