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Stock exchanges are expensive, but the bubble is in the bonds. So investing has become a puzzle


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The S&P 500 index, the most important in the world stock market, increased by 26% from the beginning of the year to November 15, reaching over 3,100 points. These are untapped levels, as are Nasdaq technology (which exceeded 8,000 points, more than 3,000 more than those 5,000 which jumped to 900 points in the 2000s when the Internet bubble burst) and Dow Jones (+ 20%). since the beginning of the year and very close to 28 thousand points).

From the period minimums, which date back to March 6, 2009, when theS&P 500 fell at the doubly fatal threshold of 666 points (also the number indicated in the Bible chapter 14 of the apocalypse as the number of the devil) the american stock market grew 367% (so more than quadrupled the value) not counting the dividends distributed meanwhile (although thinner than those distributed in Europe because in the United States a buyback logic prevails over coupons, it still represents another 2.5% per year to be included in the final calculation).

Wall Street risks a financial bubble?
The question that arises in cases such as these, where the expansionary phase of the stock exchange seems to be endless, is whether we are in the presence of a financial bubble. If that were the case, getting into those levels could be extremely dangerous, because when the bubbles burst, they hurt. And whoever remains at risk risks losing much of the capital invested.

To assess whether a stock market is expensive or not, analysts primarily use the multiple that measures the relationship between stock market price and profits. As shown in the opening chart of the article, the S&P 500 index with current values ​​(which, as mentioned, are all time highs) is worth 18.1 times the expected profits for the next 12 months. In early January 2019, the multiple was smaller (15 times). This means that with this year's high, the world's most important stock index has certainly become more expensive.


The price-earnings ratio of stock prices (Source: Sole 24 Ore Studies Office)

What is surprising, however, is that in any case, it is not a multiple that indicates the presence of a financial bubble. We are not far from the historical average (between 15 and 16 points for this index). So, with the data in hand, Wall Street is now expensive, but it does not seem – as long as earnings growth expectations for next year are confirmed – that there are conditions for a financial bubble to burst.

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