Then and Now

Today was a tough one for many market participants.  We all focused on what happened five years ago, where we were, and friends who were lost.

Everyone’s story is significant.  Mine might be unique.  I was in a hospital for major surgery.  I went under with the normal trading in a tough market, and woke up to a different world.  Perhaps I’ll write more about that on another occasion.

For now, let’s take a look at what the market has done.  Crossing Wall Street has a nice summary of what has happened in stocks over the last five years.  It is very good, and you should take a look at it in the link below.  Then come back for our take about the rest of the story.

Link: Then and Now.

…………..September 10, 2001…………..September 11, 2006 Dow………………….9,605.51…………………….11,410.68 S&P 500…………….1,092.54…………………….1,301.59 …

The item left out of the table is vital — the forward earnings for stocks five years ago versus now.  It is naive to look at market prices without considering the supporting earnings.  That is how we view individual stocks, and the market is a sum of those stocks.

Before 9/11/2001 the forward earnings projection for the S&P 500 was 55.60.  That was a PE multiple of 19.7, pretty much in line with the yield from the ten-year note.  Bonds and stocks were in line.

Now the forward earnings projection by analysts (from Thomson Analytics) is 91.6 and the PE is 14.2, implying a much higher yield than one can get from the ten-year note, which has a PE of nearly 21.

What other changes have taken place?

  • Earnings estimates and company guidance are more accurate and honest, the result of scancals and investigations.
  • Inflation is checked by greater global trade.
  • The opportunity for alternative investments — commodities, real estate, etc., is much less attractive.

These are the fundamentals that should capture the attention of individual investors.  Market valuation is not a very good timing tool since the hot money operates on the principle of local efficiency, theories about short-term sentiment, and four-year market cycles.

A longer view shows that being on the right side when major moves occur is crucial to success.  Anyone who looks back at 2000 and wishes that he had sold should take a serious look at current opportunities, the flip side of the bubble.

As Laszlo Biryini, asked about a catalyst for a rally, stated in an interview that we cited here,

My view is to understand the environment and if there are dry
papers and greasy rags, a fire will develop, but I can’t tell you where
the match will come from.

We’ll write more about possible catalysts that can break the cycle of negativity.

You may also like