Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

S&P 500 Stock Index Price Level and GDP Growth Rate

Stock-Markets / Stock Index Trading Apr 24, 2009 - 05:51 PM GMT

By: Richard_Shaw

Stock-Markets Best Financial Markets Analysis ArticleBased on US and world nominal GDP growth rates from 1981 through 2008, we make a case for the likely price of the S&P 500 between 650 and 800.

The Facts:


One problem with financial analysis is the mixing of facts with opinions and failing to note which is which.  To try  to avoid that problem, this section contains only what we would call facts — actual historical index prices and actual compound growth rates between prices over various periods; and actual US and world GDP levels and the compound growth rates between them over various periods.

Let’s begin with US and world GDP figures.

From year-end 1981 through year-end 2008, the compound annual growth rate (”CAGR”) of US nominal GDP was 5.78%.  The real GDP growth rate was 2.96%.

From year-end 1981 through year-end 2008, the CAGR of world nominal GDP was 6.19%.  The real GDP growth rate was 1.37%.

The raw data came form the IMF “World Economic Outlook” and the CAGR came from using the XIRR function in Excel.

Now let’s look at the S&P 500 price level changes.

We used the XIRR function to calculate the S&P price CAGR (not total return) from various starting points with data beginning as early as 1926, through the high reached on October 11, 2007 and through the recent low reached on March 6, 2009.

Effective rate of price return from December 1981 at various hypothetical current index price levels:

(as of April 24, 2009)

  • 600 — 5.99%
  • 650 — 6.30%
  • 700 — 6.59%
  • 750 — 6.86%
  • 800 — 7.11%
  • 850 — 7.35%
  • 900 — 7.58%
  • 950 — 7.79%
  • 1000 — 7.99%
  • 1050 — 8.19%

Effective rate of price return from 10-year average centered at December 1981 to various hypothetical current index price levels:

(as of April 24, 2009)

  • 600 — 5.43%
  • 650 — 5.74%
  • 700 — 6.03%
  • 750 — 6.30%
  • 800 — 6.55%
  • 850 — 6.79%
  • 900 — 7.01%
  • 950 — 7.22%
  • 1000 — 7.42%
  • 1050 — 7.61%

Interpretation of the Facts:

It is unlikely, in our view, that the vast bulk of the value of the US stock market (e.g. S&P 500 index) can persistently grow for long periods (e.g 27 + years since 1981) at a rate that is greater than the rate of the entire US and world economies (e.g. their nominal GDPs).

Since the US and world nominal GDPs from 1981 have been 5.78% and 6.19% respectively, those rates of growth would seem to be reasonable limits, or at least central tendencies, for the growth rate of the S&P 500 index price level.

In fact, we think, it is overreaching to assume that the S&P 500 price level could reach those growth rates, because the price level does not consider dividends that contribute roughly 1/3 of total return over long periods, according to our research and the research of others.

So, giving the index the benefit of the doubt (that it’s price could match US and world GDP while also generating substantial dividends), the current reasonable price level for the S&P 500 index may well be between 650 and 800.

spxwk3yr

Prior Probing for Likely S&P 500 Index Level:

In prior articles, we have used long-term charts (some over 80 years), historical valuation multiples, historical earnings, current earnings, projected earnings, normalized earnings, operating earnings and “as reported” earnings; as well as price-to-book, price-to-sales, and index-market-cap-to-national-GDP to try to get a handle on where the price of the S&P 500 makes the most sense.

  • Markets Are a Mixed Bag (April 18, 2009): plausible index value 400 to 925, based on various valuation methods reported in the March 9 Barron’s
  • Multi-Year Fundamental Valuation (April 6, 2009):  plausible index value 500 to 1000, based on multi-year normalized earnings and historical normalized P/E ratio
  • Price Targets for SPY (September 29, 2009): plausible index value 800 to 1050, likely 960, based on recent chart analysis of SPY, with likely 960 based on earnings at that time (SPY priced at 1/1oth of index price)

Conclusion:

Nobody knows the future, and the market humbles all men.  However, we all must peer into it anyway to choose our courses. While the markets are not rational in the short-term, they are probably rational over the long-term, so we try to be rational about what might happen.

All of the rational attempts we have made rolled up into a composite suggest that the S&P 500 is more likely, in a rational world, to be currently priced in range of 600 to 1000, with a tighter range probably 650/700 to 800/850.

Of course, being irrational in the short-term, the index could go higher or lower than that range.  Also, the current worldwide economic situation is uniquely difficult and may continue to deteriorate, making short-term predictions perilous.  In the long-term (perhaps 5 to 10 years), however, the current level of the market will likely be seen as roughly reasonable.

The apparently reasonable long-term index price notwithstanding, do note that the long-term macro view of index price behavior does not yet suggest a new upward trend is in place.  Bottoms end below and tops end above what would be considered reasonable price levels.

If you have a long time horizon, investing broadly now is probably fine.  If you have a short horizon or are currently relying on your portfolio for lifestyle support, much more cautious and selective position taking is necessary to control risk.

Winning by not losing is the byword for the retired or those who have completed the savings stage of their financial lives.

By Richard Shaw 
http://www.qvmgroup.com

Richard Shaw leads the QVM team as President of QVM Group. Richard has extensive investment industry experience including serving on the board of directors of two large investment management companies, including Aberdeen Asset Management (listed London Stock Exchange) and as a charter investor and director of Lending Tree ( download short professional profile ). He provides portfolio design and management services to individual and corporate clients. He also edits the QVM investment blog. His writings are generally republished by SeekingAlpha and Reuters and are linked to sites such as Kiplinger and Yahoo Finance and other sites. He is a 1970 graduate of Dartmouth College.

Copyright 2006-2009 by QVM Group LLC All rights reserved.

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Do your own due diligence.

Richard Shaw Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules