Arithmetic for sustained bull market adds up
Posted on June 4, 2007 by Richard Beddard
Filed Under Markets |
There are four simple arithmetical differences between conditions today and those that prevailed in the dot-com bubble.
- The first is simply that seven years have elapsed and in this period the value of US economic activity, as measured by gross domestic product, has grown by 41 per cent. Global economic activity, boosted by the spectacular growth of China and other emerging economies and flattered by the declining value of the dollar, has expanded by 60 per cent.
- …the rapid expansion of the world economy since March 2000 has been accompanied by a redistribution of global income in favour of profits. As a result, shares today are nowhere near as expensive as they were in 2000 in relation to the corporate earnings that they represent. In March 2000, the 500 shares in the S&P index were trading, on average, at 31 times their reported earnings. Today that ratio is only 18. Since this is almost exactly the average price-earnings ratio over the past 50 years (17.2), it is hard to argue that shares today are grossly overvalued in relation to profits.
- The bull market is not driven by one or two very overvalued sectors but is quite broadly based, with most industries generating good results. Although I believe that some of today’s most popular investments, such as heavy industry and commodity stocks, may be riding for a fall, it is hard to point to any companies that are remotely as overvalued as were the darlings of the TMT boom seven years ago.
- While the S&P 500 and the MSCI world index have hit new highs, most other stock market indices are still somewhat lower than they were seven years ago. London’s FTSE 100 is 4 per cent below its record of 6,930, Frankfurt’s DAX is 1 per cent off its peak and Tokyo’s Nikkei is 14 per cent below its 2000 high. How can the MSCI world index be hitting new highs daily, while most global stock markets are below their records? The answer is simple: the world index is measured in dollars. This means that a large part of its stratospheric ascent in the past five years has simply reflected the dollar’s decline.
Category: Markets
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3 Responses to “Arithmetic for sustained bull market adds up”
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I read and heard that companies are also carrying a record amount of cash on their books, so companies are fairly strong.
As for the commodities, I’d agree there are quite a few overpriced ones out there, I’ve mentioned a few on my blog, but there are also some that are very nicely priced and I’ve mentioned a few of those as well, with my reasoning.
I think you have bug for accepting comments. I’ve had two comments disappear and I’ve failed something screen come up. I’m sure I can add 1+3 and get the right answer. Anyway, I’d advise anyone leaving a comment to copy it before hitting submit because you might have to try more than once to get it to accept and you have to start over if it doesn’t accept.
Hi Deborah, thanks for popping by! We’ll look into the comment issue - you’re the second person to mention it
Richard.
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