Investors, analysts and strategists forever debate whether the equity markets are properly valued. That's the whole point of investing, after all, to figure out whether an asset is cheap, and thus poised to go higher, or too expensive, and so set for a fall. There's a bull and a bear case for pretty much any security, but this magical mystery rally has put the debate in especially sharp relief these days. As DailyFinance has noted, stocks look topped out on a technical basis and overpriced to dot-com bubble heights, but also perhaps reasonably valued or even, yes, cheap if you look at price relative to sales.
Mark Twain famously said that history doesn't repeat itself, but it does rhyme. (If it didn't, technical analysis wouldn't work at all.) It also makes comparing today's bull market to that of 1982 an ear-splitting and scary exercise. As the second nastiest recession since World War II -- and the last time we had 10.2% unemployment -- one might think comparing 1982 to 2009 would offer insights into share prices. Barry Ritholtz certainly thinks so. The CEO and director of research at FusionIQ put together such a comparison Thursday, setting the 1982 rally against today's, and it ain't pretty.
In 1982, for example, stocks were bargain-basement cheap, going for just eight times earnings. Today? They're fetch a whopping premium of 26 times earnings. The dividend yield on the S&P 500 stood at a generous 6% back in the day, whereas today it's below 2%. Stocks were also a bargain when looking at book value nearly three decades ago. Today they look distressingly expensive.
Fiscal policy, deficits, global trade barriers, regulation, the U.S. dollar, household borrowing, taxes...the differences between then and now make 2009's market melt-up almost a Bizarro World version of the Reagan rally. The remarkable contrasts make it almost inconceivable that investors would pay more than three-times as much for stocks today as they did back then.
A big part of this phenomenon is attributable to the fact that this is a rally predicated on hopes and dreams, says Sam Stovall, chief investment strategist at Standard & Poor's. The market is betting on economic and corporate profit improvement six to nine months from now, he says. In other words, it's a faith-based rally, not a fundamental one. "In a rally like this investors act more like Billy Graham than Benjamin Graham," Stovall says.
True, the massive emergence of developing markets, notably the so-called BRIC countries of Brazil, Russia, India and especially China, have structurally changed the global economy since 1982. The Beast of the East, with its red-hot growth, stimulus spending and 1.3 billion potential consumers didn't exist back then, but that doesn't mean the market is pricing the China Syndrome correctly. Intuitively, it's almost too pretty a story: "This time it's different because of China."
Phil Maymin, professor of finance and risk engineering at the Polytechnic Institute of New York University, doesn't buy that line for a second. "Wasn't it the early 80s when we were all enamored of Japan, the Rising Sun, the Eastern miracle? And the 90s was Taiwan and Thailand and Indonesia," Maymin says. "So now it's China. Bubbles, bubbles everywhere."
Yes, China's already a much bigger deal on a fundamental and economic basis than Japan or the Asian Tiger's ever could have hoped to be, but we wonder if investors aren't overpricing the would-be effects of the Middle Kingdom, if that is indeed the case.
We're going to have to go with Maymin -- not to mention Gluskin Sheff's David Rosenberg, star bank analyst Meredith Whitney and Nouriel "Dr. Doom" Roubini -- on this one. Like the fizzy lifting drink scene in Willy Wonka and the Chocolate Factory, we see bubbles, bubbles everywhere -- and fear they are propelling us right into the spinning blades of a fan.
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