Given that Alan Greenspan is speaking to Congress today it's worthwhile to remember some dates and numbers. Alan gave his initial Irrational Exuberance speech almost 6 years ago. The date ...December 5, 1996. The S&P 500 was about 100 points lower than it is right now, and the earnings were as good and of higher quality. Why can't Wall Street just admit that most equities are overvalued by 30%. We could have a nice purge...capitulation.. and then move forward. No. Looks like we are stuck with a few years of ups ,downs and price stagnation at best.
> If Templeton now thinks the DOW will hit 35,000 in 50 years, I'm not at all impressed. That would represent less than a 4% annual increase from its current 8400 level!
But consider that the annual increase from its 1929 peak to the current peak is only 4.2%. And, MOST of that return was for the reduction in risk premium (over the last 20 years) and inflation. The remainder of the 7-8% average return for stocks has been in dividend yields, which are currently about 1/3 of that seen in historical market bottoms.
What was the 5 year T note rate on 12/5/96?? I don't know if you brought interest rates into your valuation. But, I am pretty sure the Fed uses a sorta interest rate inverse model to value the S&P 500. Simply, they capitalize earnings at a multiple equal to the inverse of the T note.
When we look at these earnings, we really need to take current interest rates and inflation rates into accout, while searching for the proper valuation of the market.
Back in 1981, no one could have possibly convinced me we'd ever be talking about deflation risks. I realize deflation can become fairly lethal(because that's what the experts tell me), but if we'll all think back, "hyper"-inflation was no cake walk either. It dominated our every plan, decision, and investment. We always need our problems to worry about, I guess.
My feeling is the real economy is not quite as bad as the media experts are telling us. And, if it "catches" on, it will take off with huge profits. Companies have cut costs to the bone. When the economy picks up, a lot of the increment will fall to the bottom line. JMHO. Regards.
I agree interest rates were higher on 5 year T note in December of 1996. But. I think you have the rose colored glasses on. Another good long run measure to use alongside earnings which have averaged 15x over the last 80 years ( as opposed to 25x+ today) is 3 times book value...that would also bring the S&P back to the 500 range. Besides, a better measure of interest rates isn't the five year t note since corporations don't get that rate. Check out the average corporate bond yields. Just one more thought...I'm not saying the economy is that bad..it isn't...but U.S. equities are still overvalued by 30%. Don't take my word for it...ask Sir John Templeton...or Warren Buffett... or Robert Schiller (his book is a great Christmas gift)... or George Soros. My calculations don't count for squat but theirs do.