Bracing for the bears?
A lot has been said about an economy that has been anemic for the last year or so. But is it really? The fact that the jobs picture is not improving as fast as some have predicted does not necessarily mean that companies will not be making profits or that they aren’t sustainable. Looking at the big picture, the indexes are not too far -nominally- from where they were over a decade ago.
As was described in “The Snowball” by Alice Schroeder, Warren Buffet informed his investors during Herb Allen’s Sun Valley conference that not much had changed between the years 1964 and 1981 regarding the price level for the Dow
Sp 500 over the last decade.
Jones industrial average (874.12 vs 875.00), but that indeed a lot had changed as the US economy was vastly larger 17 years later. Similarly, looking at the SP500 today with a closing price on 8.6.2010 of 1121.64 which was the price achieved on 03.29.1998 for the first time we can also infer that not much has changed in this last 12 years. But hidden under these figures the real story is very different. Then, US GDP stood at 8.6 trillions while last reading was reported at 14.5 trillions. This means that there is an almost 70% growth in the general output that is not being reflected in the prices of the stocks. Even using inflation adjusted numbers would yield an equally surprising revelation as the economy differential would stand at roughly 3.37 trillions while a “1998 SP” would be valued at today’s inflation at 1468. That is 31% higher than today’s price level!
Clearly, stock prices appear cheap to a first observer. But the fact is that they could also remain at this level for as long as growth isn’t part of the picture… or inflation. So although there is no use in predicting where prices are headed odds -barring a catastrophe, a war or another Greek-like dive- favor the long side.
Hi, this is simple yet powerful analysis. Thank you.