Friday, April 24, 2009

Equities are still extremely cheap

Equities are up almost 30% from their early-March lows, but the market is still extremely pessimistic. As this chart shows, the long-term trend rate of increase for S&P 500 index is roughly 8% per year. Relative to that trend, current prices are about as low today as they have been in the past 60 years.


Jeff said...


Cheap realative to history I agree. However, with the amount of spending, government control, increased regulatory environment and total control of our lives that the Obama administration is trying to impose on us, the future expectations are going to be much lower I'm afraid. Check out Kulows recent blog today...very sobering and he is right. What happened to America...why do folks not see how this administration is killing our country. Just brutal..will we continue to lead the world in inventions, risk taking and growth?...tough to believe right now. I'm a small business owner and I want to believe, but it's tough right now.

Public Library said...

Here is an interesting chart showing the Nikkei 225, S/P 500, Nasdaq, and Dow during mega bear markets lasting 10 years or so.

The NASDAQ is 9 years into its bear market, the S/P only two.

It is not a far stretch to think that the recent extreme pricing in real estate and financials during the current boom/bust seems peculiarly similar to the extreme pricing during the dotcom phase or real estate bust in Japan of the 80’s. The Nasdaq is still solidly in bear market territory and the Nikkei is a shell of its former self 20 odd years later. Is it naïve to think that such extreme moments in time can potentially wipe out decades of future wealth creation thus rendering those asset classes useless for “ordinary” investors?

Forget about recession or depression, do equities make sense over the next 10 to 30 years for regular people? And if so, what is going to be the driver of growth to move them beyond bear market territory? Unless you are a “good” asset allocation manager, should ordinary people waste their time in this asset class? Buying large cap or small cap, international or local equities, emerging or not, unless you move in and out of these asset classes correctly, most people will end up with a pile of dung. That is, unless they are lucky enough to randomly retire during a boom cycle within the macro bear markets we live in today.

I am not a great market timer and over the years have realized most people should act like bankers instead of hopeful gamblers. By this I mean they should seek investments that pay interest and protect principal along the investment horizon thus reducing their dependence on end of the rainbow payoffs in the form of price appreciation. There exists an infinite amount of ways to juice up returns in a fixed income portfolio by moving out the curve or down the quality spectrum. Why waste your time in an asset class that gives you hardly anything in the form of current income with pie in the sky dreams that these companies will be around, let alone profitable in 10-30 years.

I am just one miffed investor/analyst that cannot seem to figure out why people buy into this nonsense in the first place. It is not sexy, it wont make you a gazillionaire, but it really the only true hope the “average” investor can expect in all honesty.


Scott Grannis said...

Jeff: all the reasons you cite add up to "why" the market is so low. People have given up hope. The market is thinking a depression is much less likely, but no one out there is yet even close to what might be called optimisitic.

I'm been optimistic relative to the market because I thought that all the things the market worried about were overdone. I think I'm being proven right, since the economys appears to be stabilizing. But I'm not saying yet that the future looks rosy. On the contrary, I worry a lot about the course of fiscal policy.

How low should the market be if Obama does most of the awful things he intends to do? (e.g., cap and trade, higher taxes, etc.) but the economy starts growing again, albeit slowly? Is that scenario priced in, or is it a lot more optimistic than the market expects? That is the question you need to ask yourself.

Scott Grannis said...

Bernard: You add another example of why it is that the market is still so depressed. If you have no hope for the future of free markets, if you think what Obama wants to do (i.e, Argentine Kirchner-lite) is really what the majority of people in this country want, then the strategy you outline is probably a good one.

I'm not ready to throw in the towel. I think Obama's mistakes are coming fast and furious, and they are galvanizing the population. I don't think we will do all he wants to do. Already he has been stymied in key areas. Fellow democrats are lining up to oppose his cap and trade program. This is very bullish in my view.

Paul said...

Baltic Dry Index is creeping up a little.

Scott Grannis said...

I've been watching the Baltic indices. They have risen recently, but are not yet breaking new high ground. They seem to confirm the news of a strong uptick in container shipments. Trade is definitely turning up, and that is a big positive for the whole world. The most important thing is that we are not in a downward death spiral.

dr. j said...
This comment has been removed by the author.
dr. j said...

Present is prologue. We tend to project our current experience as intuition about the future. October of 2008 saw many confident investors holding rosy expectations. October 2002 saw massive selling because investors expected massive declines. At each time, their expectations had already been fulfilled and their actions proved to be wrong: they bought at the top and sold at the bottom. Since we usually feel the best at the top and the worst near the bottom, realize that and use it as a contra indicator for yourself.

I remember in 1981 or 1982 when I was young in my investing career. I had been buying stocks and they only went lower. Money funds paid me over 20%. I had just received a $5,000 raise as a college prof and the next day my portfolio went down about the same amount. I gave up and sold out. I told my broker that I could not stand it anymore. "Why" I asked "would I risk capital when I could get 20% by doing nothing in a money market."

I sold at the very bottom. As I recall now it was August of 1982. What I learned is this: I can't change how I feel, but I can change what I do next when I feel that way again. We are all able to measure tops and bottoms by our raw emotions. Tops feel great, we believe we are smart and we count our money like Scrooge McDuck. Take some profits then. Bottoms feel like crap, we hate what we have done, blame our investments, and avoid looking at our account balances. Buy some cheap shares.

We may not be at the bottom now, but we are really close. If you are buying for a few years out, then quit acting like lovesick school boys who keep asking your investments hourly, "Do you still love me?" You will just go crazy.

I believe that worshiping of O will subside. It will be ugly until that happens. During the process, we might be able to find great values in Corp Bond Funds or stocks of companies that will be around.

Scott Grannis said...

Excellent points, dr. j. Note also how different this time is compared to the early 1980s. Back then interest rates on cash and bonds were on the moon, now they are zero on cash and very low on Treasuries.

Public Library said...

Dr J

I had no skin in the game during this recent debacle so I was not looking at real time tickers or watching the value of my house plunge along with my neighbors. I have been a mere spectator of the carnage.

What is most interesting to see is that 99.98% of the entire investing world was in on the same trades and thus everyone got it wrong. If that is not an indicator of sorts, then I am not sure what is.

The fact that our government has to secure 10 trillion worth of assets from crummy banks should send shivers down your spine.

Tack on 50 trillion in Medicare, Medicaid, and SS and you will see that we are so far in the hole it is no wonder O is trying to throw the baby out with the bath water.

Japan is our future. Bonds have remained at low levels in that country for decades while the stock markets continue their decent down.

I hope the equity market game serves you and others well. I will be collecting coupons like my grandfather for the next 40 years not wondering or worrying about whether earnings are good or bad, just whether they have enough capital to my cover my interst fees.