"Fred B. Moseley" wrote:
>
>
> Alejandro, I am very interested in your comments about the overvaluation
> of the US stock market. Unfortunately, I have not yet been able to
> download your file. In the meantime, perhaps you could elaborate a bit:
> overvaluation compared to what? historical price-earnings ratios?
> rate of interest on 10-year Treasury bonds? or something else?
Fred, the graph I sent was historical price-earnings ratios for S&P. I
am attaching tha data for such graph in html format. You can import data
from Excel 5.0 or later.
The first information about overvalaution of US stocks was in pen-l.
Here some extracts:
***********************************************************************
The Baltimore Sun June 17, 1997
Market on verge of collapse, analyst says
When the stock market crashes, it'll be like an earthquake leveling a
city. That's what Thomas H. Eichler says. And he feels the rumbling.
Eichler, who is the president and chief investment officer of Eichler
Magnin Inc., a Los Angeles-based investment management firm, says that
within the next 12 months the stock market will plunge by 50 percent.
"Within the next year we expect one of the major financial crashes of
this century. We feel there will be an economic depression. We don't
think people will have a chance to get out," he said.
Eichler is a member of a small group of experts that is bearish on the
stock market. Those who have made negative predictions over the past
three years have been baffled and embarrassed time and time again
because stocks keep driving higher.
The Dow Jones industrial average -- a closely watched barometer made up
of 30 large companies -- has more than doubled in the past 2 1/2 years,
closing Friday at 7,782.04, up from 3,838.48 on Jan. 3, 1995.
But the 35-year-old Eichler believes that the stock market has peaked
and that it is on the verge of a crash that mirrors 1929.
Here's why:
Eichler argues that there are gaping imbalances in the U.S. financial
system. While corporations are making big profits, incomes of consumers
have stagnated, the savings rate has slipped, debt levels have risen,
and taxes as a percentage of income are at their highest levels this
century, he said. "That type of mix is very worrisome," he said.
With debt levels rising and incomes barely growing, consumer spending is
bound to slow, he said. That will filter through to companies that
produce goods and services. Less money to spend means that fewer people
will buy lawn mowers or take the family out to eat.
He argues that investors are paying unrealistic amounts for stock, more
than twice their normal value. "If you went to normal valuations, we are
talking about 3,300 to 3,500 on the Dow," Eichler said. "Investors are
not prepared for this type of decline. People are really in a vulnerable
position. This financial speculation has almost been like a steroid. Be
assured, it is nothing more than just a steroid."
Some key market indicators buttress his views. Stocks in the S&P 500 are
selling at about 22 times average earnings, the highest
price-to-earnings ratio since World War II except for 1987. The market
was hit with a 35 percent correction that year.
Stocks are selling at more than four times their book value. At the
market's August 1987 peak, before the crash, they were selling at just
over two times their book value.
The dividend yield, which goes down when the price of stocks goes up,
stands at a record low of 1.73 percent. In August 1987, it was 2.54
percent. Another reason the market will fall, Eichler says, is that
investors will pump more money into foreign stocks as economies around
the world recover at the expense of U.S. companies. "It seems to me
absurd that somebody wouldn't accept my scenario," Eichler said. "It is
backed by 100 years of history and reasonable economic analysis."
****************************** End of extract
*****************************************
Obviously Mr. Eichler was wrong at least about timing of the crash.
> This is an extremely important question at the present time. It seems like the short-term future of the whole world economy hinges almost entirely on the US stock market. The US economy is the only significant economy in the world that is growing strongly at the present time. Almost all of this growth is coming from strong consumer spending (with a negative saving rate!). And this consumer spending spree has been fueled mainly by the booming US stock market. Thus, if the US stock market continues booming, then perhaps the US economy can continue rapid growth and the world economy can eventually recover. However, on the other hand, if the US stock market crashes, then so will the US economy, and with it the rest of the world.
> An important cause of the US stock market boom has been a significant
> inflow of foreign capital fleeing the crisis in the rest of the world. > So the "boom" in the US economy is in part the result of the >depression in the rest of the world.
I agree with you: the US economy is a shelter for big investors, but how
long it could happen?
The health of US economy is the key issue for the world economy. If the
US economy fall down at the same time other economies are in recession
we will face a world depression.
> Alejandro, how do things look in Mexico?
>
Mexican economy face slow down for this year, GDP rate will be 3% (5% in
98). By example automotive sales are lower in January 99 than Jan 98.
Wages are stagnated. Current account is in deficit hence it is necessary
capital inflow and it depends on "animal spirit". Then, things could be
worst but not better than estimated by Mexican government.
I am preparing by request of Jerry some background for this discussion,
hence it will be more about this..
Un abrazo
--Dr. Alejandro Valle Baeza Div. Posgrado, Fac. Economia UNAM, Ciudad Universitaria Mexico 04510, D.F. (525)6222148, fax (525)6222158 e-amail: valle@servidor.unam.mx --------------018557166AA3A7B8F1D8EA42 Content-Type: text/html; charset=us-ascii; name="tbsppeb.htm" Content-Transfer-Encoding: 7bit Content-Disposition: inline; filename="tbsppeb.htm"
<!doctype html public "-//w3c//dtd html 4.0 transitional//en">
US Price Earnings Ratios
GLOBAL FINANCIAL DATA
S&P Composite Price/Earnings Ratios, 1871-1998
| Year | High | Low | Close |
|---|---|---|---|
| 1871 | 11.61 | ||
| 1872 | 11.60 | ||
| 1873 | 10.50 | ||
| 1874 | 9.98 | ||
| 1875 | 12.27 | ||
| 1876 | 14.47 | ||
| 1877 | 10.47 | ||
| 1878 | 10.85 | ||
| 1879 | 10.95 | ||
| 1880 | 10.62 | ||
| 1881 | 14.06 | ||
| 1882 | 13.79 | ||
| 1883 | 14.20 | ||
| 1884 | 15.43 | ||
| 1885 | 17.04 | ||
| 1886 | 16.29 | ||
| 1887 | 15.29 | ||
| 1888 | 19.96 | ||
| 1889 | 17.92 | ||
| 1890 | 18.45 | ||
| 1891 | 14.97 | ||
| 1892 | 15.17 | ||
| 1893 | 18.08 | ||
| 1894 | 27.03 | ||
| 1895 | 18.48 | ||
| 1896 | 20.08 | ||
| 1897 | 14.53 | ||
| 1898 | 14.49 | ||
| 1899 | 13.05 | ||
| 1900 | 12.92 | ||
| 1901 | 15.75 | ||
| 1902 | 13.37 | ||
| 1903 | 13.48 | ||
| 1904 | 14.47 | ||
| 1905 | 13.39 | ||
| 1906 | 12.64 | ||
| 1907 | 11.82 | ||
| 1908 | 13.46 | ||
| 1909 | 12.71 | ||
| 1910 | 12.85 | ||
| 1911 | 15.63 | ||
| 1912 | 13.57 | ||
| 1913 | 13.44 | ||
| 1914 | 15.60 | ||
| 1915 | 9.46 | ||
| 1916 | 6.18 | ||
| 1917 | 6.62 | ||
| 1918 | 7.60 | ||
| 1919 | 9.41 | ||
| 1920 | 9.92 | ||
| 1921 | 23.70 | ||
| 1922 | 12.12 | ||
| 1923 | 8.79 | ||
| 1924 | 9.74 | ||
| 1925 | 8.94 | ||
| 1926 | 9.95 | ||
| 1927 | 13.21 | ||
| 1928 | 13.70 | ||
| 1929 | 16.05 | ||
| 1930 | 21.10 | ||
| 1931 | 33.67 | ||
| 1932 | 138.89 | ||
| 1933 | 29.59 | ||
| 1934 | 25.71 | ||
| 1935 | 17.218 | 10.469 | 17.22 |
| 1936 | 19.305 | 16.502 | 16.69 |
| 1937 | 17.241 | 9.259 | 9.34 |
| 1938 | 21.882 | 9.488 | 20.66 |
| 1939 | 19.881 | 13.87 | 13.87 |
| 1940 | 13.908 | 9.05 | 10.21 |
| 1941 | 10.331 | 7.283 | 7.80 |
| 1942 | 9.901 | 7.424 | 9.55 |
| 1943 | 12.422 | 9.56 | 12.42 |
| 1944 | 14.451 | 12.376 | 14.29 |
| 1945 | 18.182 | 14.184 | 18.08 |
| 1946 | 22.321 | 14.164 | 14.16 |
| 1947 | 13.966 | 9.132 | 9.47 |
| 1948 | 9.363 | 6.636 | 6.64 |
| 1949 | 7.225 | 5.754 | 7.23 |
| 1950 | 7.704 | 6.566 | 7.19 |
| 1951 | 9.709 | 7.353 | 9.71 |
| 1952 | 11.062 | 9.653 | 11.06 |
| 1953 | 10.941 | 9.001 | 9.88 |
| 1954 | 12.987 | 9.93 | 12.99 |
| 1955 | 13.333 | 11.876 | 12.56 |
| 1956 | 13.986 | 11.876 | 13.66 |
| 1957 | 14.306 | 11.682 | 12.20 |
| 1958 | 19.194 | 12.121 | 19.19 |
| 1959 | 19.157 | 16.34 | 17.67 |
| 1960 | 17.762 | 16 | 17.76 |
| 1961 | 22.883 | 17.953 | 22.42 |
| 1962 | 21.786 | 15.221 | 17.15 |
| 1963 | 18.727 | 17.331 | 18.73 |
| 1964 | 19.92 | 17.762 | 17.99 |
| 1965 | 19.841 | 16.722 | 17.58 |
| 1966 | 17.825 | 12.706 | 14.60 |
| 1967 | 18.975 | 14.948 | 17.76 |
| 1968 | 18.622 | 16.026 | 17.83 |
| 1969 | 17.889 | 15.106 | 15.36 |
| 1970 | 17.271 | 13.021 | 17.27 |
| 1971 | 20.284 | 17.212 | 18.83 |
| 1972 | 19.96 | 18.083 | 19.23 |
| 1973 | 19.531 | 12.151 | 12.71 |
| 1974 | 12.72 | 7.15 | 7.53 |
| 1975 | 11.87 | 7.69 | 11.87 |
| 1976 | 13.32 | 10.79 | 11.21 |
| 1977 | 11.05 | 8.66 | 8.85 |
| 1978 | 9.64 | 8.13 | 8.30 |
| 1979 | 8.63 | 7.14 | 7.43 |
| 1980 | 9.38 | 6.69 | 9.19 |
| 1981 | 9.28 | 7.68 | 8.00 |
| 1982 | 10.36 | 6.92 | 10.32 |
| 1983 | 13.71 | 10.35 | 12.47 |
| 1984 | 12.65 | 9.77 | 10.05 |
| 1985 | 13.78 | 9.97 | 13.78 |
| 1986 | 17.47 | 13.27 | 16.34 |
| 1987 | 23.19 | 14.73 | 15.64 |
| 1988 | 16.34 | 11.6 | 12.19 |
| 1989 | 14.87 | 12.03 | 14.71 |
| 1990 | 16.84 | 13.89 | 15.21 |
| 1991 | 23.3 | 14.33 | 23.30 |
| 1992 | 26.1 | 22.91 | 24.31 |
| 1993 | 24.79 | 22.32 | 23.05 |
| 1994 | 23.6 | 16.48 | 16.86 |
| 1995 | 17.75 | 15.71 | 17.47 |
| 1996 | 20.92 | 17.01 | 20.58 |
| 1997 | 24.02 | 19.40 | 23.99 |
| 1998 | 32.27 | 24.12 | 32.27 |
Data from the Cowles Commission is used from 1871 through 1934, and data for the S&P Composite is used from 1935 through 1995. The Cowles Commission data are annual.
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