Why a Market Crash Might Not Be Far Away

Henry Blodget sees stocks '40% overvalued'

By Matt Cantor,  Newser Staff

Posted Nov 9, 2013 3:05 PM CST

(Newser) – The stock market may be looking healthy lately, but don't be deceived, writes Henry Blodget at Business Insider: We could be en route to another crash. "Every valid valuation measure I look at suggests that stocks are at least 40% overvalued and, therefore, are likely to produce lousy returns over the next 10 years," Blodget notes. Those metrics—which include cyclically adjusted price-earnings ratio, market cap to revenue, and market cap to GDP—point to returns of about 2.5% per year for the S&P 500.

That's a lot less than recent years' returns, which have been in the double digits; it's also a lot less than the long-term average of about 10%. It wouldn't be disastrous if stocks were to "park" where they are now, "but stocks rarely 'park.' They usually boom and bust," Blodget writes. His own figures and those of analyst John Hussman suggest a crash could be as big as 55%, meaning a Dow below 8,000 and an S&P 500 below 900. "The higher we go, the less surprised I will be to see the stock market crash." He quotes Hussman:

  • "We may yet see some amount of further short-term speculation, but already for the median stock, the long-term investment outlook has never been worse."
Still, Blodget writes, he's not planning on selling. Click for his full piece.

Traders converse on the floor of the New York Stock Exchange Friday, Nov. 8, 2013.
Traders converse on the floor of the New York Stock Exchange Friday, Nov. 8, 2013.   (AP Photo/Richard Drew)
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