U.S. stocks kicked off the fourth quarter with sharp gains as the Dow Jones Industrial Average DJIAappears headed for its biggest two-day rally in more than 2½ years.But as tempting as it might be to call a bottom in stocks, Nicholas Colas, co-founder of DataTrek Research, said Tuesday... U.S. stocks kicked off the fourth quarter with sharp gains as the Dow Jones Industrial Average DJIA appears headed for its biggest two-day rally in more than 2½ years.
The one exception to this was 2020, when the S&P 500 registered 19 daily gains of 2% or more. However, Colas argued that most of these outsize moves occurred during the first half of the year, when markets were still reeling from the onset of the COVID-19 pandemic. According to the Shiller PE ratio, the long-run mean valuation for stocks dating back to the 1870s is between 16 times and 17 times cyclically-adjusted earnings. As of Friday, the S&P 500 — which was created in 1957 — was trading at 27.5 times earnings, and after Monday’s rally, it was trading at 28.2 times, Colas said.
During the dot-com blowup, the VIX “experienced a series of rolling spikes that ground away at market confidence and valuations.” Ultimately, it took 2½ years for stocks to bottom out after prices peaked in March 2000. U.S. stocks are headed for back-to-back gains on Tuesday, with the S&P 500 SPX up 2.9% to 3,784, the Dow Jones Industrial Average DJIA up 2.6% at 30,258 and the Nasdaq Composite COMP up 3.3% to 11,174.
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