The Stock Market Is Whistling In The Dark

Summary

• Despite the US and world economies being hit by an unusually serious oil, natural gas, and food price shock, over the past month the S&P 500 index has declined by only 7.5 percent from its all-time high.
• That leaves equity valuations more than 50 percent above their long-term average. It also leaves the overall valuation of the stock market at close to 200 percent of GDP, which is historically around double its post-World War II average.
• One reason for surprise at the stock market’s complacency is that we are currently experiencing the largest oil and natural gas supply disruption on record.
• Another reason that the stock market seems to be overly complacent about the energy price shock is that it appears to be overlooking the context in which that shock is occurring.