The stock market has always pulled back when valuations are stretched as they are now, according to Deutsche Bank macro strategist Henry Allen in a note to clients this week.
"[T]urning points can happen quickly, and … when valuations are stretched to start with, there can be limited scope for further gains," Allen noted.
"[E]xamples of high returns through history have often been followed by sizeable reversals."
The bank cited lofty current readings in the Cyclically Adjusted Price-to-Earnings (CAPE) ratio developed by economist Robert Shiller, arguing that "the CAPE ratio for the S&P 500 has only been higher on two other occasions in the last century" than it is today.
"Indeed, on both the occasions the CAPE ratio has got as high as it is today, there was then a significant correction."
Persons:
Henry Allen, Allen, Robert Shiller, — Scott Schnipper
Organizations:
Deutsche Bank