As the S&P 500 continues to hit resistance near its record closing high of 1,565.15 set on October 9, 2007, investors are spending a lot of time talking about where stocks are relative to all time highs. But the dirty truth is they don't matter at all. Not even a little bit. It's fun to think about where you were last time the major stock indexes were at these levels, but it shouldn't have any more bearing on your life than the outcome of your NCAA pool.
The loquacious and unusually well-coiffured Lee Munson, chief investment officer at Portfolio LLC and author of Rigged Money, joined Breakout to run through three of the nearly infinite reasons not to make too much of where the market is relative to history.
1) The Dow Jones Industrial Average is irrelevant, and the S&P 500 isn't much better
"It bothers me immensely that people even care about what the Dow does," rages Munson. The Dow is 30 companies selected by an editorial team. The selection process is like Papal elections without the smoke. No one really knows what goes on behind the scenes.
The S&P 500 is the index of record for the pros but it doesn't do a much better job of keeping precise score. Over the last 3 years about 40 companies have been swapped in and out of the S&P 500. If you go back into the meat of the crisis when financial companies were simply disappearing at a stunning rate, the problem becomes worse.
Using an index as an absolute market measure is like tracking your height without regard to what kind of shoes you're wearing.
2) It doesn't account for inflation
Inflation rates have been subdued over the last decade plus but years of compounding add up. Running the numbers through a simple online inflation calculator shows the S&P 500 is still more than 10% off its 2007 high, and that all-time high isn't usually measured against 2000 when the S&P got over 1,500 for the first time.
Munson tells you the real all-time high at the end of the clip... See if you can guess.
3) This business cycle is different
Relative highs only matter as a function of fundamentals. Stocks trading at a PE of 50x are, at least by that measure, much more expensive than a market priced at 10x earnings. The result of that multiplier, in other words the nominal value of the market, tells you very little about how richly it's priced.
To that point Munson makes the case that the U.S. could be in the middle of an elongated business cycle. For whatever reason (most likely the Fed) business cycles have been extending. The result is a seemingly endless recession leading to a long but almost imperceptible recovery.
"We may be seeing three, four, five years of economic growth," Munson notes, and "we're hitting 'all-time highs' in the middle of a business cycle not necessarily at the end". Trailing PE means nothing; if earnings keep expanding it helps stocks.
As for when the S&P 500 made its real all-time high? August of 2000 at 2,045 in today's dollars. If you want to get that record celebration you need to wait for another 30% worth of gains.
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