Why Markets Aren’t in the Holiday Spirit

With the S&P 500 down about 3% this month, the stock market is having one of its worst Decembers on record. Absent a late comeback, what has tended to be the stock market’s best month is looking like a big disappointment.

But why? A good starting point for looking at this selloff is prices. The S&P 500 is trading at about 16 times expected earnings, according to FactSet, putting it at its most expensive level, other than earlier this year, of the past decade. And the cyclically adjusted price/earnings ratio popularized by Yale University economist Robert Shiller , which seeks to smooth out temporary swings in earnings, is now above 26 times. That puts it well above its half-century average of 20.

When stocks are expensive, they are more vulnerable to bad news. One reason investors haven’t minded paying up for stocks in recent years, however, is that with rates so low, the alternatives of Treasurys have seemed so unattractive. The Federal Reserve’s decision to raise rates last week may helped provoke a reassessment—not because rates are no longer extraordinarily low, but because it is easier for investors to imagine a day when they aren’t with Fed officials projecting they will raise rates by a full percentage point next year.

Source: Why Markets Aren’t in the Holiday Spirit

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