Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Pastimes : Clown-Free Zone... sorry, no clowns allowed -- Ignore unavailable to you. Want to Upgrade?

To: ild who wrote (208338)	12/8/2002 4:20:45 PM
From: yard_man	Respond to of 436258

Nice piece by Faber here: dailyreckoning.com

To: ild who wrote (208338)	12/8/2002 4:22:03 PM
From: yard_man	Respond to of 436258

nice piece by Faber here: dailyreckoning.com

To: ild who wrote (208338)	12/8/2002 7:50:16 PM
From: ild	Respond to of 436258

... To get an idea about valuations here, note that the year 2000 peak in S&P 500 earnings was about $50 (the current level is $26.74). When we form P/E ratios for the major indices, we typically use prior peak earnings on the belief that the steep decline in earnings during recessions is temporary and fails to reflect sustainable earnings power. On the basis of peak earnings, the S&P 500 P/E is currently over 18, compared to a long-term historical average of 14 and a historical median of 11. Importantly, stocks are very long-term assets. Fluctuations in current inflation and short-dated interest rates have far less impact on appropriate P/E ratios and stock yields than is widely believed. Even a 30-year bond has an effective "duration" of only about 16 years. The effective duration of the S&P 500 (related to the ratio of price to free cash flow) is currently over 50 years. Current interest rates and inflation are no lower than they regularly were prior to 1965. Yet compared with historical periods of low inflation and interest rates, stock valuations are at levels only seen near the 1929 peak. Of course, the change in stock prices is the result of both changes in the P/E ratio, and changes in earnings. Over the past 10, 20, 50 and 100 years, peak-to-peak earnings growth for the S&P 500 has averaged just under 6% annually. So let's assume that S&P 500 earnings quickly recover to their year 2000 peak, and then continue to grow at a rate of 6% peak-to-peak into the future. Now do the inconvenient math. Even if the S&P 500 P/E ratio was to reach its historical average P/E a full 20 years from now, the average annual capital gain on the S&P 500 index over that period would be ( [1.06][14/18]^(1/20) - 1 = ) 4.7% annually. Add in an average dividend yield of about 2%, and stocks are priced to deliver a return over the coming two decades of less than 7% annually, even if stocks never see a below-average P/E ratio again. Carrying that same analysis to the median price/peak-earnings ratio of 11 (the average bear market has ended at a multiple below 9, but 11 was the low of the 1990 bear), the S&P 500 would earn an average annual capital gain of about 3.4% over the next 20 years, and a total return of less than 5.5% annually, even if stocks simply touch that median of 11 even 20 years from now. A lot can happen over 20 years that might prompt such contact. hussman.com