I manage corporate pension plans for a living. I also read a lot and try to understand the world and events around me. I knew there were severe risks in the system yet, I didn't expect the recent selloff to be so swift. I'm trying to fairly value or project the course of the broader US markets, SPX and DJIA for this crash. I want to build a thesis that I can measure and would be welcome to ideas.
I recently heard that If we take the DJIA in 1982 and add annualized real US GDP as a percentage to the DOW, the figure is somewhere between 3500-4000. I am going to confirm this. Does anyone have thoughts on the long term projection or what we will eventually see as fair value ? If there is already a link on this, I apologize for a re post and please point out.
Regards, MOS
Long Term Downside Forecasts
Re: Long Term Downside Forecasts
mosullivan wrote:I manage corporate pension plans for a living. I also read a lot and try to understand the world and events around me. I knew there were severe risks in the system yet, I didn't expect the recent selloff to be so swift. I'm trying to fairly value or project the course of the broader US markets, SPX and DJIA for this crash. I want to build a thesis that I can measure and would be welcome to ideas.
I recently heard that If we take the DJIA in 1982 and add annualized real US GDP as a percentage to the DOW, the figure is somewhere between 3500-4000. I am going to confirm this. Does anyone have thoughts on the long term projection or what we will eventually see as fair value ? If there is already a link on this, I apologize for a re post and please point out.
Regards, MOS
See the following, which describes it in detail:
** How to compute the 'real value' of the stock market.
** http://www.generationaldynamics.com/cgi ... anic070820
Sincerely,
John
Re: Long Term Downside Forecasts
Should I ask my employer's HR department what they are invested in? What if they give me the run-around? I am almost 60 years old. Is my promised pension about to go "poof?"
Re: Long Term Downside Forecasts
I have researched this to no end and a fair, mean historical value for the Dow always seems to come out between 4,000 and 8,000, with 8,000 seeming the least likely because of the huge, long term bubble we have been in for the past 2 decades.
All the valuations I try to apply confirm this. PE ratios are currently a bit over 20 for the S&P 500, not the 10-15 commonly quoted on CNBC. History shows us they should fall to as low as 6 at the bottom of a severe bear market.
Book value is also about twice the mean average and should be expected to fall significantly below the mean average if we are in a severe bear market.
Here's a Valueline DJIA chart that I used. It goes from 1920 to 2006:
http://www.valueline.com/pdf/valueline_2006.pdf
Here's a good article that deals with long-term historical valuation of the stock market
http://seekingalpha.com/article/90537-b ... -the-guide
To me, this is the final shoe to fall: all these "experts" on CNBC must be taught that you can't just make things up and ignore all but the last 20 years of history; all of us consumers must learn that we can't have things without working for them. This will take years and along the way our economy will suffer but we will become better for the lessons that will be forced upon us. Those that have always lived within their means and those that accept the lessons quickly will suffer the least.
My bottom line is that a drop to under 2,000 on the DJIA is possible while a drop to under 5,000 is almost certain, based on simple reversion-to-the-mean principles.
One thing about this situation that strikes me is how "it can't get any worse" and then it goes ahead and gets worse. We truly are in "The Great Unwind", my name for our very own great despression.
--Fred
All the valuations I try to apply confirm this. PE ratios are currently a bit over 20 for the S&P 500, not the 10-15 commonly quoted on CNBC. History shows us they should fall to as low as 6 at the bottom of a severe bear market.
Book value is also about twice the mean average and should be expected to fall significantly below the mean average if we are in a severe bear market.
Here's a Valueline DJIA chart that I used. It goes from 1920 to 2006:
http://www.valueline.com/pdf/valueline_2006.pdf
Here's a good article that deals with long-term historical valuation of the stock market
http://seekingalpha.com/article/90537-b ... -the-guide
To me, this is the final shoe to fall: all these "experts" on CNBC must be taught that you can't just make things up and ignore all but the last 20 years of history; all of us consumers must learn that we can't have things without working for them. This will take years and along the way our economy will suffer but we will become better for the lessons that will be forced upon us. Those that have always lived within their means and those that accept the lessons quickly will suffer the least.
My bottom line is that a drop to under 2,000 on the DJIA is possible while a drop to under 5,000 is almost certain, based on simple reversion-to-the-mean principles.
One thing about this situation that strikes me is how "it can't get any worse" and then it goes ahead and gets worse. We truly are in "The Great Unwind", my name for our very own great despression.
--Fred
Re: Long Term Downside Forecasts
What we can be absolutely sure about is that most of the "experts" will be dead wrong. Read the following article and then check the current stock prices. Anyone following this man's advice would be much worse off than if they had invested in the S&P 500.
http://www.forbes.com/business/forbes/2 ... 1/110.html
This guy is just so typical of the wall street buffoons out there who can't look beyond the 1950's when they gather their stats. Please, think for yourself!
Generational Dynamics, IMO, should not stand on its own, it should be factored into any analysis of the economy. For instance, in 2000 you could have predicted a severe downturn but after the incredible excesses of the 80's and 90's it should have been much more severe than it was which would have kept a smart analyst on guard for the real generational panic to come. When you wind up a rubber band too tight it will either break or unwind very rapidly...hold on for the ride because there's much more to come.
--Fred
http://www.forbes.com/business/forbes/2 ... 1/110.html
This guy is just so typical of the wall street buffoons out there who can't look beyond the 1950's when they gather their stats. Please, think for yourself!
Generational Dynamics, IMO, should not stand on its own, it should be factored into any analysis of the economy. For instance, in 2000 you could have predicted a severe downturn but after the incredible excesses of the 80's and 90's it should have been much more severe than it was which would have kept a smart analyst on guard for the real generational panic to come. When you wind up a rubber band too tight it will either break or unwind very rapidly...hold on for the ride because there's much more to come.
--Fred
Re: Long Term Downside Forecasts
I worked out a model in 2002 or 2003 based on the data Robert Shiller had posted on the net. If you figure the dividends are going to hold up, the SPX then was worth about 370, which would figure about 450 now. That would give a Dow of about 4000. I believe the US GDP is overstated, but the historical peak of stock price to GDP was 80%. That was the peak in 29 and 66. We have been much higher for years, but I would venture about 60% would be upper range. That would be around 7.2 trillion once the air comes out of the bubble. The SPX is about 70% of the cap value of the market and at 800 it is worth about $7 trillion, so we have about 30% to go to get to reasonable. That would put us in the 560 range, but the market can go much lower toward the 40% range, which would be 4.8 trillion. This puts the SPX in the 420 range. I believe there is an outside chance the Dow goes below 1000 due to big time bear markets of the past. They are now trying the Japan fix and the Japan market recently made a new bear market low in a bear that started in 1990. It made 7000 after being at 39000 at its peak. That is about 17%.
Re: Long Term Downside Forecasts
I agree with your conclusion and have validated them using every type of valuations I can think of that are pertinent: PE ratios; book value, dividends; overall ROE...they all say the market is going significantly lower.mannfm11 wrote:I worked out a model in 2002 or 2003 based on the data Robert Shiller had posted on the net. If you figure the dividends are going to hold up, the SPX then was worth about 370, which would figure about 450 now. That would give a Dow of about 4000. I believe the US GDP is overstated, but the historical peak of stock price to GDP was 80%. That was the peak in 29 and 66. We have been much higher for years, but I would venture about 60% would be upper range. That would be around 7.2 trillion once the air comes out of the bubble. The SPX is about 70% of the cap value of the market and at 800 it is worth about $7 trillion, so we have about 30% to go to get to reasonable. That would put us in the 560 range, but the market can go much lower toward the 40% range, which would be 4.8 trillion. This puts the SPX in the 420 range. I believe there is an outside chance the Dow goes below 1000 due to big time bear markets of the past. They are now trying the Japan fix and the Japan market recently made a new bear market low in a bear that started in 1990. It made 7000 after being at 39000 at its peak. That is about 17%.
We hear way too much gobbledeguck based on speculation and personal biases. This is the type of forecast that is based on facts and historic trends and not just "this is the way I want it to be" feelings expressed by people like Larry Kudlow of CNBC and most of the other talking heads.
Figuring out the true value of the stock market is not that difficult; timing the changes can be but if one is not clear about the direction of the market at this point in history you really shouldn't be investing at all. Calling a bottom (as way too many analysts are doing at this time) while the market is just entering a secular bear phase and is still a bit over its historic "fair value" and the economy is just starting to tank is just plain crazy...almost as crazy as buying overpriced stock or houses in the hopes of selling them for even higher prices.
I guess the final question is: just how bad will things get for the average person out there?
--Fred
Re: Long Term Downside Forecasts
I have also spent significant time trying to determine "fair value" for the US market and have come up with similar conclusions. Depending on the policies taken by government I get a target price of either S&P 150 or 450. Policy makers are currently making every mistake possible, leading me to believe the former price is the more likely.
However, as a short-term speculator (formerly more intermediate-term, but volatility makes that impossible), I must be careful to believe that this will all happen in a straight line and all of these Pollyannish "analysts" will all of a sudden become realistic. There are many factors that could ensure this process of price discovery takes many years (decades?) with even multi-year rallies in between. We do have the ability to create wealth through technological advancement on massive scale that could cause major investment opportunities before the larger trend reasserts itself. The spectre of hyperinflation can also not be ignored. I am and have been for years a "deflationist" but under the correct set of circumstances (major war, for example) government's willingness to go into even further amounts of debt to fight all-out wars could be substantial. Under this scenario, our valuation methods would be massively skewed.
However, as a short-term speculator (formerly more intermediate-term, but volatility makes that impossible), I must be careful to believe that this will all happen in a straight line and all of these Pollyannish "analysts" will all of a sudden become realistic. There are many factors that could ensure this process of price discovery takes many years (decades?) with even multi-year rallies in between. We do have the ability to create wealth through technological advancement on massive scale that could cause major investment opportunities before the larger trend reasserts itself. The spectre of hyperinflation can also not be ignored. I am and have been for years a "deflationist" but under the correct set of circumstances (major war, for example) government's willingness to go into even further amounts of debt to fight all-out wars could be substantial. Under this scenario, our valuation methods would be massively skewed.
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richard5za
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Re: Long Term Downside Forecasts
I agree with the replies that long term views of where stock markets are heading must be based upon P/E ratio forecasts; historical PE's not forward.
If you take the last 80 to 100 years of Dow or S&P 500 P/E ratio data, and then compare that to other economic indicators, you will find that your best mathematical correlation is to the CPI. When the CPI is positive but small (low positive inflation) P/E ratios have been high. When the CPI is high, or negative (deflation) P/E ratios have been low. The historical range is huge from less than 6 to P/E's of more than 40!
In my opinion all forward market forecast analysis must start here.
An interesting fact emerges as soon as you become immersed in these figures: You soon conclude that in the short and medium term investors are frequently irrational, but not so in the long term. This means that many so called experts talk a great deal of rubbish much of the time.
Spend a few minutes playing with P/E ratio maths. You will see that the ratio itself has a greater influence upon share prices than earnings. If earnings remain unchanged and the P/E ratio goes from 6 to 24 the shares increase in price four fold.
Where is the P/E ratio heading for the S&P 500?
I really can't envisage price stability with low positive CPI's going forward. Its either deflation, which is what John predicts, or high inflation through the government printing large amounts of money to try to save the day. As John wrote that book title 1,2,3 .. infinity! It happens so quick.
I am forecasting that the P/E ratio of S&P 500 will be down to below 10 within the next two to three years, because that is a case of history repeating itself. If the P/E ratio goes to below 10 then share prices will at least halve from current levels because company earnings are unlikely to increase, the oposite being more likely.
Timing is always the problem. If you do the long term analysis I suggested above, you will see that if you work in decades you can be a genius forecaster. But how do we handle shorter periods? For this I use technical analysis (charts) for the short to medium term insights but strictly within the framework of the long term.
Regards to all who visit this site,
Richard
If you take the last 80 to 100 years of Dow or S&P 500 P/E ratio data, and then compare that to other economic indicators, you will find that your best mathematical correlation is to the CPI. When the CPI is positive but small (low positive inflation) P/E ratios have been high. When the CPI is high, or negative (deflation) P/E ratios have been low. The historical range is huge from less than 6 to P/E's of more than 40!
In my opinion all forward market forecast analysis must start here.
An interesting fact emerges as soon as you become immersed in these figures: You soon conclude that in the short and medium term investors are frequently irrational, but not so in the long term. This means that many so called experts talk a great deal of rubbish much of the time.
Spend a few minutes playing with P/E ratio maths. You will see that the ratio itself has a greater influence upon share prices than earnings. If earnings remain unchanged and the P/E ratio goes from 6 to 24 the shares increase in price four fold.
Where is the P/E ratio heading for the S&P 500?
I really can't envisage price stability with low positive CPI's going forward. Its either deflation, which is what John predicts, or high inflation through the government printing large amounts of money to try to save the day. As John wrote that book title 1,2,3 .. infinity! It happens so quick.
I am forecasting that the P/E ratio of S&P 500 will be down to below 10 within the next two to three years, because that is a case of history repeating itself. If the P/E ratio goes to below 10 then share prices will at least halve from current levels because company earnings are unlikely to increase, the oposite being more likely.
Timing is always the problem. If you do the long term analysis I suggested above, you will see that if you work in decades you can be a genius forecaster. But how do we handle shorter periods? For this I use technical analysis (charts) for the short to medium term insights but strictly within the framework of the long term.
Regards to all who visit this site,
Richard
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