With the S&P 500 at levels that haven’t been reached since the go-go days of the late-1990s, there’s talk of 2013 being the new 1999. Joshua Brown devastates that comparison in a lengthy post, but the core of it is right here:
Here’s a very rudimentary but essential thing to be aware of - in 1999 the S&P finished at 1469, earned 53 bucks per share, and paid out $16 in dividends. These are nominal figures, not adjusted for inflation.
The 2013 S&P 500 is earning double that amount - over $100 per share. The index will also be paying out double the dividend this year, more than $30 per share, and returning even more cash with record-setting share repurchases.
So that’s the fundamentals. Earnings are double what they were, and dividends have doubled accordingly. It’s a very different market. Gillian Tett, who I normally think is one of the most reliable financial journalists around, recently pooh-poohed current share prices as based on unsustainable central bank interventions. This seems to me to be superficially correct but fundamentally mistaken. What is true is that had the Federal Reserve implemented tighter monetary policy over the past two years, share prices would be much lower today than they are. But under the Fed’s status quo policies, inflation has been below target and unemployment has been high. There’s a strong case money’s been too tight, and zero case that money’s been too loose. Looking forward, you get much the same situation. If the FOMC implements new tight money policies at its next meeting, that will, indeed, crush the market. And that’s something investors should consider. But why would the Fed implement tight money policies with unemployment high and inflation low? Are they deranged sociopaths?
Perhaps they are—the European Central Bank does, in fact, turn out to be run by deranged sociopoaths. But to say that the stock market will not be able to sustain its current prices if central bankers begin implementing wildly inappropriate monetary policies is simply to state the obvious. That’s not a bubble. Prosperity is everywhere hostage to public policy and always has been. There are never guarantees that the powers that be won’t do something extremely foolish. For all we know, something will go horribly wrong next month and we’ll all die in a nuclear war. But it would be odd for the survivors to look back and say, “Well there sure was a doozy of a stock market bubble.”
Prices are more or less in line with earnings and dividends. Interest rates are low because inflation is low. Everything is as it should be. If central bankers screw up, we’re doomed. But that’s a reason for them to avoid screwing up.
