Tuesday, March 3, 2009

Coincidence? (2)

I've talked before about how gold is a good measurement standard, mainly because it has held its value relative to other assets pretty well over long periods. This chart uses gold to measure the value of U.S. equities by dividing the S&P 500 by the price of gold. If I extended the chart back to 1928, you would see that equities today are worth almost exactly the same in terms of gold as they were back then; they've oscillated up and down in a wide range, but the trend is relatively flat.

I've highlighted three points on this chart, and calculated the amount by which the U.S. stock market has declined as of today relative to those three points. From the day Obama took the lead in the polls, the market has lost over half its value; since the November election the market is down by 45%; and since the stimulus bill was passed, the market is down by a bit more than one-third.

I can't prove that these three events had anything to do with the cause of the market's decline, but that it is all a coincidence is not so obvious to me.

HT: John Hearne

14 comments:

Mike Eliason said...

Even though Obama's policies are disastrous for the economy, what do you think about the present valuation of stocks? I was looking at Robert Shiller's history of P/E ratios, and pretty much everytime that the average P/E dipped below 10 has marked a historic time to buy stocks, regardless of what was going on in the economy. In February I believe he indicated the P/E for the S&P 500 was around 13. Do you think we're close to the kind of bottom we had in 1974 and 1932 -- which were bottoms reached in the midst of awful policy -- but were incredible money making opportunities.

Scott Grannis said...

I've talked about market valuation quite a few times since last October, noting that at the lows of November the market was priced to an economy worse than that of the Great Depression. Corporate bonds were priced to default rates much higher than at any time during the Depression.

At today's levels, by almost any metric you choose, the market is not only priced very cheaply in historic terms, but a comprehensive view of the implications of things like credit spreads suggests that the market is priced to an economic future that is almost catastrophically bad. Pretty much "the end of the world as we know it."

The market is thus extremely vulnerable at these levels to any kind of good news, or even just to the absence of worse news than we've already seen. For example, if Obama decided to back off on the implementation of a carbon cap and trade system that could send the market sharply higher.

So I have to believe we are at or near levels that are extremely attractive. Valuations are at extremely low levels, policy proposals are terrible, and the news is awful. Such is the stuff of which bottoms are made. I hope.

Unknown said...

I like this post form Barry R in describing the current situation:-

http://www.ritholtz.com/blog/2009/03/markets-are-rorschach-inkbot-tests/

Scott Grannis said...

The article you cite makes some very good points, but it neglects to mention that economies, like markets, are driven at least in part by expectations of what the future holds. If consumers are extremely worried about the future, for whatever reason, they will (and they have) cut their spending and corporate profits will suffer.

Caz said...

This is just obviously fallacious.

The S&P has been rallying off Obama on TV since October.

The mkt rallied INTO the election, and INTO his inaug. The subsequent sell offs were people taking off their longs.

This is a good blog, but your recent posts on this stuff reek of Republican agitprop talking points.

Jon S. said...

Caz wrote: "The S&P has been rallying off Obama on TV since October."

On Oct. 1, 2008, the S&P 500 was at 1161. Yesterday it closed at 700. So who's being fallacious here?

Paul said...

Caz,

I'm missing the reason you think the market loves Obama. Is it his tax hikes on the most productive? His budget monstrosity and unsustainable deficit projections? His protectionism? Cap-and-trade? His demonization of the wealthy? Clearly, every time he, or one of his tax-cheats in the cabinet, opens their mouths for a major announcement the Dow drops like a stone.

Unknown said...

Caz . . .

Is that an acronym for "Cranial Activity Zero?"

Scott Grannis said...

Caz: I fail to see the logic in your argument. Why were people taking off their longs? The market has obviously taken a huge beating in the wake of the emergence of Obama and his policies; could that not be at least part of the reason for the selloff?

Jeff said...

Scott, have you thought that it actually might be "the end of the world as we know it"??

Scott Grannis said...

According to Gerald Celente, we may indeed be on the way to "the end of the world as we know it."

http://www.trendsresearch.com/

I hope Celente and the market are both wrong.

Mike Eliason said...

If it is the end of the world as we know it, it won't matter how much money you have. So I'm willing to bet that it's not and go "all in".

Scott Grannis said...

Mike: You've got it exactly!

Cabodog said...

Celente has a slick website. The only thing missing is the obligatory picture of him with Bill Clinton...