Monday, September 30, 2013

Stocks on solid ground

Reasonable people can disagree about whether stocks are overvalued, or whether the Fed's massive QE purchases of bonds have distorted interest rates and asset values. I'm on record as suggesting stocks are attractive and QE hasn't artificially stimulated the economy or the markets. With that in mind, I offer a collection of charts that show how the behavior of stock prices has been commensurate with various measures of improvement in the economy.

The chart above compares unemployment claims (inverted), to show that stocks have fairly closely tracked the decline in unemployment claims.

The chart above compares the inflation-adjusted level of the S&P 500 to an index of truck tonnage carried, itself a proxy for the physical size of the economy. The chart suggests (correctly, when viewed after the fact) that stocks were very expensive in 2000, having "overshot" the improvement in truck tonnage, and that stocks were very cheap in early 2009, having contracted by more than the decline in truck tonnage. 

The chart above compares the level of factory orders to the S&P 500. Post-recession, stocks have increased by almost exactly the same order of magnitude as factory orders.

It should not be surprising that corporate profits tend to rise in line with the growth of the economy. (What should be surprising, however, is that since 1975 the S&P 500 tends to be a constant multiple of after-tax corporate profits.) This chart shows that, since 1959, stock prices (excluding dividends) have increased by a factor of 30, while after-tax corporate profits have increased by a factor of 54, with most of the difference attributable to the period prior to 1975. Once again, the overvaluation of stocks in 2000 is quite evident.

The economy is doing better, and so are stocks. There is no sign here of any irrational exuberance on the part of stocks.


Unknown said...

Scott, have you ever read any of Daniel Alpert? Just curious on your thoughts as I came across a interesting preview of his new book arguing that not only has the world been experiencing a capital glut, but a labor glut as well and it is only going to get worse.

A Supply Side Nightmare Scenario:

Cheap money, speculative bubbles, over supply of global labor, declining wages, worsening, income disparity all here for good.

Hans said...

"QE hasn't artificially stimulated the economy or the markets."

Then what was the purpose of QE in the first place?

Or it is a complete and utter failure or "feel good" Fed policy...

Hans said...

Read what the NYFR has to say about QE...

Hans said...

It is possible, that BarrockoCare; higher taxes; thousands of new regulations had a very serious impact on the Fed's QEs?