Trailing period GDP growth doesn’t mean really anything. Instead, we really have to look at a) expected going forward stock market earnings growth vs. b) dividend yields, c) changes in valuation ratios over holding period (i.e. current and projected future market valuations - driven by net changes in capital flows).
So…let’s look at price to sales and price to earnings for the market as a whole.
The 10 year Price to sales on the SP500 is around 2.23. The 14 year around 2.29. The current price to sales on the SP500 is 2.91. The SP500 is clearly relatively expensive. But, at the height of the tech bubble, P2Sales of SP500 reached 3.85. So…the SP500 is relatively expensive…the question…do we really feel that long term SP500 growth prospects are significantly better now then on average over the past 14 years? Or do we want to play with momentum traders. (I don’t on #1, but do on #2, at least sometimes).
The reason the market reached such ‘excessive’ valuations in 2000 was that there was a huge new technological disruption (the internet)…and people were trying to figure out how this would impact things…throw in some momentum trading…and behavioral exuberance and there it is.
For PE Ratios…the 10 year SP500 EBITTTM/MktCap Ratio is 11.85. Current ratio is over 14. So…unless you think the long term growth rate of the US SP500 has changed significantly (and for the better), the market’s overpriced right now. But…it could stay overpriced (and get more overpriced) for awhile.
So…if we assume div. yield is 2% and long-term real growth rate is roughly the real GDP growth rate (3.27%) + the inflation rate (3.22% historically)…That gets us to 8.49% nominal return…or 5.27% real. Then…if the Sales to book multiple falls back to it’s 10 year trend line, we would have a -20% to -24% movement down in the market over that time (depending on the Sales or Ebit trend lines). So…if we held the SP500 for 5 years and that’s what happens…we would break even. Of course, a lot could change. The growth rate could spike up or down. Inflation could spike up or down, etc. But…the valuation we enter the market at matters a lot. It’s also possible the market ‘overcorrects’ on the down side…or continues spiking on the upside. But, on a basic fundamentals standpoint, markets not looking so hot right now.
For SP400…10 year average of 2.2 Currently at 2.61. So…less expensive relative to large cap. For PE’s…10 year average is 12.67. Current is 12.58.
For SP600…10 year average of 2.01. Currently at 2.2. Price to sales reached 27 in the tech bubble run up. For PE’s…the 10 year trailing SMA is over 16. Current is over 25.
So…all the universes are historically expensive. Best values at the moment in the US, appear to be in mid-caps.
For R2K. The 10 year Price to sales on the R2000 (as reported on P123 charts) is around 52.2. The current price to sales is 46.55. (These numbers get distorted because of some big spikes in times of severe market stress…P123 needs some filters to take out outliers).
For all min. liquidity universe is used:
MktCap>50 and AvgDailyTot(100)>500000 & close(0)>2
