Market Valuation Since 1933

Charles

Well, perhaps more accurate title should be inferred market valuation.

Here's quick look at performance of S&P 500 during the past twenty years, along with trend-line suggesting that current level may be slightly elevated:



I find a similar indication in Morningstar's Fair Market Value, which looks back about twelve years:



But as several of us (namely Ted, Ted, and Ted) have posted lately, despite recent run-up, stocks need to continue such gains for a while if they are going to make-up for lost decade of 2000's and deliver more historical levels.

What are those historical levels?

Here's look back 40 years, which suggests we remain under-valued:



And 60 years, which suggests we remain under-valued:



Finally, a look back 80 years, which again suggests we remain under-valued:



Now, I recognize a lot of folks say that best days for US economy are behind us due to debt, demographics, and other things. They point to softening GDP. If they're right, then I suspect we should be troubled by current valuation levels.

But if trends of last 80 years, which include post depression, several recessions, multiple wars, dawn of nuclear age, extraordinary jet age, explosion in computing power and telecommunications, terrorist attacks, space age, miracle of modern medicine, manipulated markets, Ponzi schemes, housing bubble, tech bubble, savings & loan debacle, etc, etc...then, I suspect the market remains under-valued, especially given strong balance sheets of US companies, supportive monetary/fiscal policy, and (ok, call me a Pollyanna) an enduring American Dream.

scott

Martin Armstrong: Dow 30,000 by 2015.

http://seekingalpha.com/article/1602862-heeding-martin-armstrongs-dow-forecast-30-000-by-2015?source=google_news

"All I can say is that the MAJORITY absolutely must always be wrong. This has led to many accusing me of manipulating the world economy as if some plot in a James Bond movie. So just because the majority of articles are asking WHERE IS THE RECOVERY proves the point. Why have stocks NOT collapsed with a sharp rise in long-term rates already? June exports from China dropped sharply so that implies the USA consumer is buying less. Where will a recovery come from?

We are not dealing with a recovery that is rooted in economic expansion. We are dealing with a shift in assets from PUBLIC to PRIVATE and that does NOT require economic GDP growth. It is a move to safety."

_______________________________________________________

I still have a great deal of concerns big picture, but I do listen to Martin Armstrong.

MaxBialystock

"...We are dealing with a shift in assets from PUBLIC to PRIVATE and that does NOT require economic GDP growth. It is a move to safety."

Sorry, too cryptic for me. This means...what?

JohnChisum

I see a lot of the 70's in our current situation. We don't have the high inflation (as far as what the government figures say), or the high interest rates either but the malaise and negative feeling are there. Unemployment is higher than normal for what is supposed to be a economic recovery. Half the country is on a government benefit of one kind or another.

So the big question is, are we just starting in this period of Jimmy Carter-like malaise or will a change in the political arena in 2016 spur the recovery that everyone has been waiting for? Personally, I haven't seen anyone yet that might spark that change. Not to get too political here but hope and change has been none of the above.

We do indeed live in interesting times.

[Deleted User]

The user and all related content has been deleted.

MJG

Reply to @scott:

Hi Scott,

Thank you for the Martin Armstrong heads-up.

I am not familiar with the man, his models, or his record. He certainly has the credentials to operate in the economic forecasting community. Also, I respect your recommendations and take them seriously. So I plan to visit his website and examine his methods and performance records.

I am a little queasy with regard to his inclusion of the mathematical term Pi (3.14) in his analysis. That seems a little too convenient in his modeling. Certainly the boom and bust timeline cycles do not follow a simple Pi relationship. They are unevenly spaced and of considerably varying length. But I will examine his work fairly with an open mind.

Thanks again for the reference.

Best Wishes.

Old_Joe

Reply to @Maurice: We may be on opposite sides of many issues, but not this one. I completely agree.

BobC

Actually the government numbers are pretty accurate, as far as they go. Years ago, they decided to remove the more volatile food and energy prices from the official CPI calculation. As Maurice and Old Joe both say, REAL inflation numbers are clearly different from OFFICIAL inflation numbers. On the other hand, we would not be squawking so much if food and energy prices were NOT going up. The fact is that those are the two things that affect most of us the most. I think a lot of information the government releases is indeed often manipulated - like employment, housing, income, tax, etc. I am not sure inflation is among them. But I do agree that the current calculation leaves two important numbers out of the picture.

Investor

Reply to @BobC: The core CPI number excludes them but often reported nominal CPI does. Food and energy is most visible numbers as you shop for these often. They are volatile and we do remember the spikes but our memory fools us as we tend to ignore the declines. So, core is good to measure the trend but not suitable for sine other stuff.

Secondly, food and energy as much as we talk still makes up a small amount of monthly expenditures of an Average American family. It is higher for the poor, lower for the rich. US weight in CPI is smaller than some other emerging countries.

VintageFreak

What I don't understand is how you drew them trend lines. Seems like an arbitrary straight line. Can you please clarify?

Charles

Reply to @VintageFreak: Hi. Nope, it's not arbitrary. It's based on so-called "least squares" fit. Basically, positioning the line so that it is closest to all data points.

It's an automatic function inside Excel. Here's formal definition:

Returns values along a linear trend. Fits a straight line (using the method of least squares) to the arrays known_y's and known_x's. Returns the y-values along that line for the array of new_x's that you specify.

So, for log scale in this case, the slope of a straight line represents the compounded rate of return. Pretty cool! And, profoundly important to wealth accumulation over extended times.

Hope that helps.

VintageFreak

Thanks. 80 year trends though. That's more than most people's lifetime. If someone drew the same chart till March 2000, what conclusion would one draw, before seeing portfolio fall 50%. Then not recovering for another 10 years. Also the least squares fit whatever will keep changing every year, so what is over valued vs under valued around it will keep changing too right?

In any event, my point is waiting for 10 years to confirm a belief based on past 70 may not be foolish, but IMHO practically impossible to follow. I just hope for everyone's sake we are not at a third top now. While we seem to have blown through it, who knows what next 2 years will bring.

Charles

Reply to @VintageFreak:

I just hope for everyone's sake we are not at a third top now.

You and me both.

Investor

I love these log charts. The slope of the best fit line is the growth rate.