Traden4Alpha
Senior Member
Posts: 14043
Joined: Sep 2002
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Mon Mar 02, 09 04:51 PM
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Quote
Originally posted by: macrotrade
I think you should use market-cap to GDP: Barrons Article
Interesting! That's as good a ratio as any (and better than most). Of course if the GDP falls another 10%, then the 40% floor for the S&P will be 488.
Shiller's 10-year PE isn't bad, either except that it now spans the internet and housing bubbles. Perhaps we need a 100-year Shiller that spans a larger number of business cycles.
In all of these ratios are the assumptions that the S&P 500 companies hold a relatively constant fraction of the economy, that they have a relatively constant long-term level of earnings, and that investor's demand for "risky" equity-provided earnings holds constant. The first assumption seems fine to me (entrepreneurs notwithstanding), but the second two seem wrong to me. Growing taxes and on-going debt payments will be a real drag on equity earnings as a % of GDP. The continuing aging of the Baby Boomers will also dampen appetites for risky returns.
One reason that the market has lagged the drop in earnings is that everyone still has rosy forecasts for 2010. For the past 18 months, everyone has assumed that recovery was only 6 months away with a nice V-shaped recovery.
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"It often happens that a player carries out a deep and complicated calculation, but fails to spot something elementary right at the first move." -- grandmaster Alexander Kotov --inscribed on gift chess sets given by Amaranth hedge fund.
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