per family, i am sorry. however, read this:
The Pain of Average Results
So what would happen today if stocks fell back to just their average share of GDP - 52.2%? Current GDP is just over $10 trillion. So for stocks to fall just to their average percentage of GDP, they'd have to fall by over $10 trillion. To put that in perspective, that would mean a 66% decline in stock indexes. You'd have Dow 3,640 and Nasdaq 961.
Sounds a little extreme. Again though, we're just talking about stocks reverting to their average percentage of the economy. But let's say it's not that bad. Let's say stocks were valued at equal to the rest of the economy. A one to one ratio. Even then, you'd have to see another $6.5 trillion lopped off the market cap, or 40%. You'd have Dow 6,400 and Nasdaq 1,129.
You may have a hard time believing it. Most investors will, until it's too late. But all you're seeing here are the facts of history.
There have been only three times in history when the ratio between stock prices and earnings has been as high as it is now. And each time, it hasn't been earnings that have gone up. It's been stock prices that have come down...a long long way. When things get out of balance, something has to give.
After the huge bull market of the 1920s, the P/E ratio reached 32.6. But by June, 1932 after stocks had finished their death march, the S&P Composite Index had fallen 80.6%. It wasn't until 1958 - 29 YEARS LATER - that the S&P reached its 1929 value.
The second example of a high P/E ratio was 1966, when the average P/E reached 24.1. According to Robert Shiller's book Irrational Exuberance, by 1968 stocks were down 56% from their earlier high. It wasn't until December 1974 they reached their '66 high again.
It's worse in real terms. Shiller says, "Real stock prices would not be back up to the January 1966 level until May 1992. The average real return in the stock market (including dividends) was -2.6 % a year for the five years following January 1966, -1.8% a year for the next ten years, -0.5 a year for the next fifteen years, and 1.9% a year for the next twenty years.
And the third time stocks have been priced so high? Even after last year's bloodbath, stocks are still way too high. The P/E on the S&P is still over 24. If history is any guide, this market is in for a terrible day of reckoning. Much worse, by far, than most investors are expecting.
Could you afford to retire if all you made on your stocks over the next 20 years was a lousy 1.9% a year? Probably not. But that may very well be what most investors will get from the market - if stocks do as we expect and return to their normal values. It's simple third grade math, addition and subtraction. |
