On Tue, 24 Apr 2001, Steve Keen wrote:
> I'm also curious as to how Allin's results were arrived at.
>
> How do you reconcile them with the fact that price to earnings ratios have
> reached historic highs during the last 2 years?:
>
> DJIA P/E ratio: 22.7; earnings $466.06 - dividend yield < 1.7%
> S&P 500 P/E ratio: 24.5; earnings $50.81 - dividend yield < 1.3%
> (data for April 23 2001 from fiendbear.com)
My impression is that while the market was considerably higher at the
end of the 1990s than it had been for several years, it was not out of
line with the longer picture over the postwar years. The ratio to
corporate profits was similar to the figure towards the end of the
1950s, and the late 1960s.
Since people may well have doubts about the model I estimated,
here are the (relatively) raw data.
cpatax = Corporate Profits After Tax with IVA and CC Adjustment;
Billions of dollars, SAAR
tcm10y = Bond rate: 10-year Treasury Constant Maturity
sp14 = DJ Industrial Average Close (av'ge of monthly values)
pvprof = 100*cpatax/tcm10y
djratio = sp14/pvprof
cpatax tcm10y sp14 pvprof djratio
1959.1 29.2 3.99 599.7 731.8 0.81949
1959.2 31.9 4.26 637.1 748.8 0.85076
1959.3 29.1 4.50 657.0 646.7 1.01598
1959.4 29.9 4.58 661.7 652.8 1.01362
1960.1 31.4 4.49 623.1 699.3 0.89099
1960.2 29.4 4.26 622.6 690.1 0.90213
1960.3 29.5 3.83 607.6 770.2 0.78885
1960.4 28.4 3.89 597.8 730.1 0.81886
1961.1 27.6 3.79 662.3 728.2 0.90946
1961.2 30.5 3.79 686.5 804.7 0.85302
1961.3 31.4 3.98 708.8 788.9 0.89845
1961.4 33.2 3.97 718.9 836.3 0.85961
1962.1 37.1 4.02 705.0 922.9 0.76394
1962.2 36.6 3.87 613.3 945.7 0.64852
1962.3 37.2 3.99 595.4 932.3 0.63858
1962.4 39.4 3.90 630.4 1010.3 0.62400
1963.1 39.5 3.89 676.1 1015.4 0.66583
1963.2 41.3 3.96 717.2 1042.9 0.68768
1963.3 41.9 4.03 719.2 1039.7 0.69171
1963.4 42.9 4.12 756.2 1041.3 0.72626
1964.1 46.8 4.18 799.6 1119.6 0.71415
1964.2 46.7 4.20 821.0 1111.9 0.73835
1964.3 47.2 4.19 851.7 1126.5 0.75604
1964.4 46.7 4.17 874.2 1119.9 0.78060
1965.1 53.3 4.20 898.5 1269.0 0.70801
1965.2 54.5 4.21 902.8 1294.5 0.69737
1965.3 55.2 4.25 901.8 1298.8 0.69432
1965.4 57.3 4.47 958.9 1281.9 0.74807
1966.1 59.5 4.77 953.4 1247.4 0.76432
1966.2 58.2 4.78 896.0 1217.6 0.73587
1966.3 56.9 5.14 803.3 1107.0 0.72568
1966.4 58.7 5.00 794.8 1174.0 0.67700
1967.1 56.8 4.58 851.8 1240.2 0.68681
1967.2 55.9 4.82 870.0 1159.8 0.75016
1967.3 56.9 5.25 910.7 1083.8 0.84030
1967.4 58.2 5.64 886.9 1031.9 0.85944
1968.1 54.9 5.61 845.6 978.6 0.86405
1968.2 57.8 5.74 903.0 1007.0 0.89675
1968.3 57.8 5.46 904.9 1058.6 0.85483
1968.4 58.1 5.77 960.4 1006.9 0.95382
1969.1 57.2 6.18 928.9 925.6 1.00363
1969.2 55.3 6.35 920.3 870.9 1.05680
1969.3 54.1 6.86 821.8 788.6 1.04202
1969.4 49.5 7.30 822.9 678.1 1.21357
1970.1 46.2 7.37 769.1 626.9 1.22690
1970.2 49.6 7.71 706.7 643.3 1.09847
1970.3 48.4 7.46 753.1 648.8 1.16082
1970.4 44.9 6.85 796.2 655.5 1.21469
1971.1 54.4 6.02 883.9 903.7 0.97814
1971.2 55.6 6.25 913.6 889.6 1.02694
1971.3 58.4 6.48 881.2 901.2 0.97780
1971.4 61.2 5.89 853.5 1039.0 0.82142
1972.1 64.5 6.03 923.7 1069.7 0.86352
1972.2 65.3 6.14 948.0 1063.5 0.89135
1972.3 69.2 6.29 947.2 1100.2 0.86099
1972.4 72.5 6.37 997.9 1138.1 0.87678
1973.1 76.3 6.60 968.4 1156.1 0.83765
1973.2 72.5 6.81 904.8 1064.6 0.84992
1973.3 74.6 7.21 920.4 1034.7 0.88953
1973.4 75.2 6.75 876.6 1114.1 0.78684
1974.1 69.8 7.05 854.3 990.1 0.86284
1974.2 65.6 7.54 813.8 870.0 0.93537
1974.3 56.6 7.96 681.3 711.1 0.95815
1974.4 58.7 7.67 633.5 765.3 0.82772
1975.1 67.9 7.54 737.0 900.5 0.81841
1975.2 77.4 8.05 844.2 961.5 0.87801
1975.3 88.8 8.30 820.2 1069.9 0.76666
1975.4 94.3 8.06 849.7 1170.0 0.72625
1976.1 99.1 7.75 982.5 1278.7 0.76833
1976.2 94.6 7.77 991.6 1217.5 0.81448
1976.3 95.4 7.73 982.8 1234.2 0.79636
1976.4 96.3 7.19 972.3 1339.4 0.72592
1977.1 101.2 7.35 936.6 1376.9 0.68026
1977.2 117.1 7.37 914.0 1588.9 0.57523
1977.3 130.2 7.36 866.2 1769.0 0.48967
1977.4 123.1 7.60 826.4 1619.7 0.51022
1978.1 120.8 8.01 756.5 1508.1 0.50160
1978.2 134.1 8.32 832.3 1611.8 0.51639
1978.3 137.3 8.49 868.3 1617.2 0.53692
1978.4 142.7 8.82 798.8 1617.9 0.49374
1979.1 135.4 9.11 836.7 1486.3 0.56297
1979.2 135.2 9.11 839.7 1484.1 0.56582
1979.3 134.2 9.10 870.9 1474.7 0.59053
1979.4 133.3 10.45 825.6 1275.6 0.64723
1980.1 120.2 11.99 841.6 1002.5 0.83950
1980.2 108.8 10.48 845.3 1038.2 0.81422
1980.3 108.8 10.95 933.4 993.6 0.93944
1980.4 117.0 12.42 960.6 942.0 1.01971
1981.1 129.9 12.96 975.3 1002.3 0.97302
1981.2 132.4 13.75 988.8 962.9 1.02692
1981.3 148.0 14.85 894.6 996.6 0.89762
1981.4 141.0 14.09 872.2 1000.7 0.87158
1982.1 130.7 14.29 839.4 914.6 0.91779
1982.2 141.3 13.93 826.6 1014.4 0.81490
1982.3 141.2 13.12 868.7 1076.2 0.80721
1982.4 139.4 10.67 1025.8 1306.5 0.78519
1983.1 159.2 10.56 1106.1 1507.6 0.73369
1983.2 174.7 10.54 1216.1 1657.5 0.73368
1983.3 182.3 11.63 1216.2 1567.5 0.77587
1983.4 191.4 11.69 1253.3 1637.3 0.76545
1984.1 204.8 11.94 1180.0 1715.2 0.68797
1984.2 215.6 13.20 1136.0 1633.3 0.69553
1984.3 218.2 12.87 1182.1 1695.4 0.69725
1984.4 224.3 11.74 1202.6 1910.6 0.62946
1985.1 219.9 11.58 1279.2 1899.0 0.67363
1985.2 225.5 10.81 1303.0 2086.0 0.62463
1985.3 236.0 10.34 1336.7 2282.4 0.58566
1985.4 222.3 9.76 1464.4 2277.7 0.64293
1986.1 209.8 8.56 1699.6 2450.9 0.69344
1986.2 199.3 7.60 1851.1 2622.4 0.70590
1986.3 189.1 7.31 1813.7 2586.9 0.70113
1986.4 178.9 7.26 1896.0 2464.2 0.76942
1987.1 197.6 7.19 2228.9 2748.3 0.81102
1987.2 216.3 8.34 2332.2 2593.5 0.89923
1987.3 229.6 8.88 2610.5 2585.6 1.00962
1987.4 234.5 9.12 1922.0 2571.3 0.74748
1988.1 254.9 8.42 2006.0 3027.3 0.66262
1988.2 265.0 8.91 2068.4 2974.2 0.69544
1988.3 268.3 9.10 2091.1 2948.4 0.70924
1988.4 283.3 8.96 2143.9 3161.8 0.67807
1989.1 253.4 9.21 2298.1 2751.4 0.83526
1989.2 253.5 8.77 2446.4 2890.5 0.84634
1989.3 257.1 8.11 2696.9 3170.2 0.85072
1989.4 252.9 7.91 2701.5 3197.2 0.84496
1990.1 269.5 8.42 2641.7 3200.7 0.82534
1990.2 285.9 8.68 2804.7 3293.8 0.85152
1990.3 253.9 8.70 2657.4 2918.4 0.91056
1990.4 262.6 8.40 2545.2 3126.2 0.81416
1991.1 303.1 8.02 2844.2 3779.3 0.75256
1991.2 296.6 8.13 2940.7 3648.2 0.80607
1991.3 292.2 7.94 3028.4 3680.1 0.82291
1991.4 298.7 7.35 3044.2 4063.9 0.74907
1992.1 325.4 7.30 3242.2 4457.5 0.72735
1992.2 318.4 7.38 3358.2 4314.4 0.77837
1992.3 272.6 6.62 3307.6 4117.8 0.80325
1992.4 323.3 6.74 3277.5 4796.7 0.68328
1993.1 321.4 6.28 3372.0 5117.8 0.65887
1993.2 338.1 5.99 3490.4 5644.4 0.61838
1993.3 346.2 5.62 3582.0 6160.1 0.58148
1993.4 374.8 5.61 3706.2 6680.9 0.55475
1994.1 333.4 6.07 3815.5 5492.6 0.69466
1994.2 386.4 7.08 3688.4 5457.6 0.67582
1994.3 404.1 7.33 3840.4 5513.0 0.69661
1994.4 422.0 7.84 3827.2 5382.7 0.71103
1995.1 427.0 7.48 4004.2 5708.6 0.70144
1995.2 446.7 6.62 4447.5 6747.7 0.65911
1995.3 474.1 6.32 4702.7 7501.6 0.62690
1995.4 483.4 5.89 4982.4 8207.1 0.60708
1996.1 517.0 5.91 5489.3 8747.9 0.62750
1996.2 523.3 6.72 5622.3 7787.2 0.72199
1996.3 531.1 6.78 5675.8 7833.3 0.72457
1996.4 550.2 6.34 6333.1 8678.2 0.72977
1997.1 571.5 6.56 6758.1 8711.9 0.77573
1997.2 593.7 6.70 7337.6 8861.2 0.82806
1997.3 613.1 6.24 7930.1 9825.3 0.80711
1997.4 607.9 5.91 7724.5 10286.0 0.75098
1998.1 580.4 5.59 8417.3 10382.8 0.81070
1998.2 568.2 5.60 8971.8 10146.4 0.88423
1998.3 569.0 5.20 8088.3 10942.3 0.73918
1998.4 564.1 4.67 8963.4 12079.2 0.74205
1999.1 604.3 4.98 9483.9 12134.5 0.78156
1999.2 585.9 5.54 10773.2 10575.8 1.01866
1999.3 587.9 5.88 10607.2 9998.3 1.06090
1999.4 622.3 6.14 11034.9 10135.2 1.08878
2000.1 650.0 6.48 10663.6 10030.9 1.06308
2000.2 671.5 6.18 10568.0 10865.7 0.97260
2000.3 679.7 5.89 10796.0 11539.9 0.93554
2000.4 647.0 5.57 10724.5 11615.8 0.92327
The model I estimated was in "error correction" form:
ld_sp14(t) = beta_0 + beta_1 ld_pvprof(t)
+ beta_2(l_pvprof(t-1) - l_sp14(t-1)) + u_t
where "ld_" denotes a log-difference (first difference of log) and
"l_" denotes a natural log. The implied long-run proportion is
exp(beta_0/beta_2), which I found to be 0.906.
Allin.
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