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October 5, 2007

Recs

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June 03, 2013 – Comments (13)

On October 5, 2007, the S+P 500 closed at 1557, according to Google Finance.  There may have been intraday highs slightly higher than this but I think that we can more or less agree that 1557 was close to the 'generational high' of our last American bull market.

On May 22, 2013, the S+P closed at 1686 or thereabouts.  That is 8.2% greater than the 2007 high that I mentioned.  In other words, over roughly 5.5 years, the S+P posted an 8.2% gain, high-to-high.  That works out to an annual percentage rate gain of about 1.8%, dividends excluded.  (The math becomes complicated when you consider how dividends might be reinvested, so I've ignored them, but I imagine you'd get closer to an annual gain of 3.5% with them factored in.)

1.8% is actually fairly close to the annual GDP growth rate of the USA during that period.  So I have just one question for the Fools who've been debating the wisdom of further QE:

On Oct 5, 2007, do you believe US equity stocks were fairly valued for future growth?  Knowing what you know now, would you have been a net buyer of stocks on that date?  Would you have wanted that date to be your entry point for stocks?  Sit back and take a look at the chart, and historical S+P P/E ratios, before you answer, if you like.

13 Comments – Post Your Own

#1) On June 03, 2013 at 3:17 PM, Valyooo (99.63) wrote:

I'm a little confused about what your message is.  Of course nobody wants to buy at a market top...so what does the GDP thing have to do with it? And are you saying now we are as overvalued as then?

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#2) On June 03, 2013 at 8:23 PM, ikkyu2 (99.38) wrote:

Valyoo: yes, I am making a case for the market being overvalued now as much as then.  I'd like someone to take some potshots at that idea, punch holes in it, give me a reason not to believe it.

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#3) On June 04, 2013 at 2:20 AM, valuemoney (99.99) wrote:

Not even close.

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/spearn.htm

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#4) On June 04, 2013 at 2:27 AM, valuemoney (99.99) wrote:

Now add the fact treasury's ten year compared to 2007. Plus the banks are arguably the best capitalized they have ever been and the record about of cash on companies balance sheets. Earnings should go UP also. Housing recovery will drive this.

 

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#5) On June 04, 2013 at 2:39 AM, valuemoney (99.99) wrote:

The markets yield is getting much lower. I will give you that. But it isn't under 2007's yields.

1557 with earnings of 82.54 = PE of 18.86 which gives u a yield of 5.3%

1686 with earnings of 103 = PE of 16.38 which gives u a yield of 6.11%

% difference = roughly 15% which is pretty big in my mind

Now add in

1. cash on balance sheet

2. housing recovery

3. bank capital

4. rate on 10 year compared to 2007

5. earnings will increase this year

 

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#6) On June 04, 2013 at 2:51 AM, valuemoney (99.99) wrote:

Would I buy the market as a whole at these prices? yes but only if cash and bonds were my only two other options

The nice thing is I only buy individual stocks and in almost any market there are good deals out there. Things get mispriced.

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#7) On June 04, 2013 at 3:12 AM, valuemoney (99.99) wrote:

Do you know why peoples thinking is always flawed when it comes to investing and the stock market?

You are doing it yourself. You are talking about prices and levels but you need to concentrate on YIELD. Price matters but when you state a price you should always follow that with the earnings and quality of earnings followed by the yield.

That chart I gave. People need to cover up the price and just focus on the yield the market is giving you.  

EARNINGS drive the price...... and you just want a good yield to start with...... relative to your other options.

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#8) On June 04, 2013 at 3:20 AM, valuemoney (99.99) wrote:

Redo the blog and DON"T use the prices of the S&P use the earnings yield. The compare that to the TEN YEAR yield. Then compare that to your yield on cash. I bet if you did that you would like the market right now.

Which yield would you want?

6.11%

2.12%

0%

I choose 6.11%

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#9) On June 04, 2013 at 10:37 AM, Valyooo (99.63) wrote:

Valuemoney,

 

there are other asset classes besides 10 year treasury bonds and the s&p.  I would gladly buy reits and mlps and emerging market bonds over the spy right now

 

ikkyu2,

 

I hate you, because of the title of your ghm crackers, in my soup blog, I have that godawful shirley temple song stuck in my head.  So, you suck 

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#10) On June 04, 2013 at 8:01 PM, valuemoney (99.99) wrote:

Good points but REITS and MLPs are part of the market are they not? I agree there are other places like Europe to look for better yields. Stocks there are much cheaper.

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#11) On June 05, 2013 at 10:42 PM, ikkyu2 (99.38) wrote:

There are some REITs in the S+P 500; not aware of any MLPs which are.

Valuemoney, you make good points.  Thanks for putting so much time and thought into your replies. Agree that if I had a 10 year time horizon and my other choices were cash or bonds, the S+P 500 right now would be a no brainer, the obvious choice. 

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#12) On June 06, 2013 at 2:18 AM, valuemoney (99.99) wrote:

Well thanks for the post! I am horrible when it comes to that. It's good to see peoples thoughts. And don't get me wrong I know the market was overbought and it can correct at any time but that isn't my game in RL to time the market. Also the yields aren't great for the S&P but the aren't terrible considering rates.

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#13) On June 06, 2013 at 12:03 PM, Valyooo (99.63) wrote:

valuemoney, I se you put a lot of emphasis on valuing businesses.  What do you use to do so, or what books do you think are best for that?  I am pretty good with seasonal swings and buying during panics and asset allocation...I am not the greatest with individual stocks and would like to improve in that area but dont really know how

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