I haven’t written much recently about the soaring valuations in stocks but my friend, JP, shared this chart earlier this week and it had me asking myself once again, “If 2000 was a bubble, what is this?”
S&P EV/Ebitda trades at 2000 bubble levels.
10y Ebitda growth in 2000: +91%
10y Ebitda growth in 2016: -5% pic.twitter.com/0SeDVEgxVN
— JP Compson (@JPCompson) August 1, 2016
Now most people seem to answer this question by saying, “the dotcom boom was an epic explosion in investor euphoria and we haven’t seen anything like it this time.” I don’t disagree that we haven’t seen the same sort of euphoria we saw back then. But investors are clearly displaying another type of euphoria today that is no less impressive than that earlier episode.
Today’s euphoria is directed squarely at yields and what some have come to call, “bond alternatives.” Treasury bond yields have fallen to record lows but what is even more stunning is just how far certain, yield-focused segments of the equity market have soared in recent months. Not only have they set new record-highs in terms of valuation, they have done so to a degree that should almost never happen.
Michael Lebowitz shared a chart today showing the utilities sector, one of the most popular yield-focused segments of the equity market, trading at 3 standard deviations, also called “sigma,” above its long-term average. Jeremy Grantham defines a bubble as a 2 sigma event, which should occur every 44 years or so. This 3 sigma event in utilities is statistically the very same degree of overvaluation we witnessed in residential real estate at the height of its recent bubble and should only occur once every 1,200 years, according to Grantham.
— Michael Lebowitz (@michaellebowitz) August 4, 2016
I asked Michael to share his data with me so I could run the numbers on consumer staples stocks, as well, another very popular focus of those looking for, “bond alternatives.” I found that they currently trade 2 standard deviations above their 10-year average valuation (in terms of enterprise value-to-EBITDA, the same measure Compson uses in the chart at the top of this post), also meeting Grantham’s definition of a bubble.
In other words, there is in fact a bubble in the markets right now. It’s a bubble focused in STUB (staples, telecom, utilities and bonds). And it’s not likely to end any differently than any other bubble we have witnessed over the past couple of decades.