Thursday, March 5, 2009
The S&P 500 is back to levels last seen in mid-1996. This is reminiscent of a period of similar duration which ended in 1974; both times the price of the S&P 500 failed to register any net progress for over 12 years. This chart puts the two stock market plunges in a different perspective, by comparing market cap to nominal GDP (i.e., it simply divides the S&P 500 index by trillions of nominal GDP, which makes it a proxy for how the valuation of equities has behaved relative to the size of the market). Today, stocks relative to the size of the economy are almost as poorly valued as they were at the market bottom in 1974. Business ain't worth much, it seems, and just about all the gains that accrued from 1974 until 2001 have been wiped out. Any way you look at it, it's ugly. Conservatives might say we've turned our backs on the Reagan revolution, while Democrats might say we've just come back down to earth.
If there are any instructive parallels between today and the 1962-74 bear market, it would be bad government policies. Monetary policy was erratic and quite inflationary from 1965 through 1974, and monetary policy in the past 12 years has been terribly erratic, alternating between being too tight and too easy. Fiscal policy became both expansive and oppressive in the 1960s, with LBJs Big Society programs providing "stimulus," while top income tax rates of 70-80% were meant to pay the bills. Fiscal policy is now very expansive, following the "stimulus" package passed last month, and with much more to come if Obama's budget proposals are enacted. Top earners already pay a much bigger share of total income taxes than ever before, and once again, they are going to be asked to pay the bills. Notably missing from the discussions in Washington today is any mention of the need to stimulate the supply side of the economy with increased incentives to take risk. Moreover, massive quantitative monetary ease poses serious risks of inflation in the future. There is no place for capital to hide in this environment.
Bigger government, high or rising tax rates, and inflation are a prescription for economic malaise at best, and major financial losses at worst, if our history and the experience of Europe in recent decades is any guide.
Can't somebody on Team Obama figure this out??? We need less emphasis on stimulating demand, and renewed respect for those doing the heavy lifting, taking the risks, and paying the taxes.
Posted by Scott Grannis at 1:06 PM