I am beginning my 54^th year in the investment business.  The stock markets so far this year are the most expensive ever during my career.    The average Price-Earnings Ratio(P/E) of the Dow Jones Industrial Average (DJIA) was 14.2-times over the last century.  Between 1950 and 2000 the average was 12.9-times and the average dividend yield was 4.4%. 

This century the DJIA price-earnings ratio has been just above 18.  This past January saw the price earnings ratio hit an all time high of 28.45.  Since then it has traded around 24-times earnings, or roughly 61% above its long-term norm.  The S&P 500 Index is over valued today by roughly the same percentage as the DJIA. 

At the peak of the market that led to the Great Depression, on the last Friday of August 1929, the P/E ratio was 15.6.  From that day to the bottom, in May 1932, the index lost 90% of its value.  Only once has this been equalled when the NASDAQ Tech-bubble peaked at 183 times-earnings in March 2000.  This implosion saw this index also fall 90%. 

I never hear Wall Street and Bay Street mention corporate earnings.  Today, the only thing that matters is whether sales are increasing.  This makes absolutely no sense unless it results in profits.  Without growing earnings there can be no dividend increases and companies cannot re-invest in their business.  Growing sales means nothing if they are not translated into earnings. 

The brokerage industry is probably scared to mention profits because they know the stock markets are too expensive and they do not want to scare away investors.  Their sole job is to sell securities.  That is why you never hear them suggest selling securities for being too expensive. 

The reason for this change is that with the Dow trading at 23-times earnings today it means the stock markets expects corporate profits will double in 3.1 years. This has never happened in the history of any stock market, plus it is probably impossible to achieve with taxes and government regulation always changing, mostly for the worst. 

This is the second longest bull market on record, so its days are probably numbered.  The best result would be if the P/E drifts calmly down to 18 times earnings (23% decline).  If a quick drop occurs the stock markets will fall further than they should.  The collapse in the stock markets after the Hi-Tech implosion saw the Dow fall to a P/E of nine. 

Not only are the stock markets very expensive, real estate, especially in big centres like Vancouver, San Francisco, London, Toronto, Sydney, and Zurich to name a few, bare no relationship to household income.  This is an accident waiting to happen.  It is a matter of when, not if.  If the stock markets and real estate fall at the same time a world-wide recession will begin.  With personal and government debt in record territories it is not hard to see a possible decade long correction.  President Trump is determined to plunge the world into a deep recession.  He will probably be very successful.We believe the world is about to enter a new era.