US Market Analysis September 2022

The scale of the bubble in the US market is still continues to be significant even by the historical standards. Financial markets continue to under assess the conditions and near future prospects.

Furthermore, there is an extreme deviation of the current market estimates of the corporations by P/E from the 150-year trend. In September, the US market was 2.35 times more expensive according to the arithmetic mean and 2.55 times more expensive according to the geometric mean according to the 150-year trend of the average market valuation P/E.

In addition, even after the market fell by 15-17% relative to the January highs, according to P/E, the current estimate corresponds to the dot.com bubble in 2001 and is twice as expensive as the large-scale bubble of 1930, after which the market fell into despondency for close to 50 years.

There have been three bubbles in 150 years – 1930, 2001 and 2021. Each had its own reasons and features of the collapse and subsequent stabilization, but this is not about history.

The behavior of the market continues the trend of high inflation, even though crude prices continue to drop. For 150 years, with inflation above 6%, the market has never been quoted at P/E above 17. Currently, it's almost twice as expensive.

The weighted average market estimate during the period of inflation above 6% was 11.5 P/E, while there was a fairly long period of time (over 10 years in total), when the concentration of market estimates was distributed in the range from 6 to 10 P/E.

The higher the inflation, the lower the P/E. The market is afraid of both deflation and high inflation, but there is more inflation, and the best range of inflation for sustainable growth is from 1 to 2.5%, when the market's highest estimate is.

According to Coindesk, with the ETH/BTC ratio trading at previous highs, some have started to unwind their long ETH/short BTC trade," one researcher said.

Overall, all the above exorbitant multipliers of the market worked only in conditions of low inflation, cheap money and endless QE. Hence, this era is over and the tightening phase has begun with expected failure. To normalize the ratios of the balance sheets, the market will have to double in the medium term from the current levels.