In reviewing the status of the market late last week, the condition of the data was something of an anomaly… On the valuation front, stocks are presently overvalued, but to levels that we’ve observed at least several times in history. The anomaly relates to market action, where we can no longer find a single historical instance where stocks were more overbought on the combination of short- and intermediate-term measures we respond to most strongly. Indeed, only one instance comes close, which is November 28, 1980.
Now, if that date doesn’t ring a bell, I have to admit that it didn’t resonate with me either at first. On that date, the stock market was just a few months into a fresh economic recovery following the 1980 recession, employment conditions were just beginning to improve, capacity utilization was picking up, the Purchasing Managers Index had just moved back over 50, and stocks were certainly not overvalued on the basis of normalized earnings or cash flows. Indeed, the P/E multiple of the S&P 500 was just over 9, on the basis of both trailing and normalized earnings. Advisory sentiment was not strenuously bullish either, so there was little to identify it as a date to remember.
As it happened, however, November 28, 1980 was the peak of the furious advance in S&P 500 driven by enthusiasm over “less bad” economic news, though with little proven economic strength. It was the last day of the 1980 bull market. The economy later proved to have been in a short lull within a double-dip recession, taking stocks to their final lows in 1982.
– John Hussman, “The Stock Market Has Never Been This (Intermediate-Term) Overbought”, Weekly Market Comment, October 19