Best of the Week
Most Popular
1.Gold Price Target of USD 2,300 - GoldCore
2.Greece Banking System Collapse Monday as ECB Pulls the Plug, Capital Controls Ahead of GrExit - Nadeem_Walayat
3.Why British Muslims Are Leaving Elysium Paradise for Syrian Hell - Nadeem_Walayat
4.Greece BANKRUPT! Financial and Economic Collapse to Follow IMF Debt Default - Nadeem_Walayat
5.Extreme Gold/Silver Shorting - Zeal_LLC
6.European Empire Strikes Back Against Greek Debt Fantasy, Counting Down to GREXIT - Nadeem_Walayat
7.Gold And Silver – Three Choices: Sell, Hold, Hold and Add. A Trading Treatise - Michael_Noonan
8.Gold and Silver Price Headed for Breakdown - Jordan_Roy_Byrne
9.Greece Crisis OXI - Raul_I_Meijer
10.Flatline Investing and Dead End Debt Schemes - Doug_Wakefield
Last 5 days
Financial and Commodity Markets Become Scary: Crash Point Or Turning Point - 5th July 15
A Revolutionary Pope Calls for Rethinking the Outdated Criteria That Rule the World - 5th July 15
Forget 'Haircut', Instead Syriza Plans Beheading of Greek Bank Depositors, Theft of Deposits - 5th July 15
The Pentagon’s 2015 Strategy For Ruling the World Through Endless War - 5th July 15
United States Celebrates the Disastrous Secession From Great Britain - 5th July 15
Greece Referendum Vote Result Forecast Yes Win, But Depression Will Continue - 5th July 15
The Great Greek Economic Depression - 4th July 15
Happy 4th of July Stock Market Analysis - 4th July 15
The Most Pressing Reason Yet You Want to Avoid Investing in Retail Stocks - 4th July 15
Fed’s Full Normalization and the Stock Market - 3rd July 15
The U.S. Dollar's 2014-2015 Rally: Wave 3 in Action - 3rd July 15
Stock Market Where are we? And where are we Going? - 3rd July 15
Xi’s Anti-Corruption Campaign Is Key to China’s Prospects - 3rd July 15
How the New Iranian Nuclear Deal Will Impact Crude Oil - 3rd July 15
China's Stock Market Rollercoaster Ride Continues - 3rd July 15
Gold Stocks Cheap to Buy but Not for Long - 3rd July 15
Capital Controls and a Bank Holiday in Greece… Here’s How You Can Profit - 3rd July 15
Greece's Varoufakis: I will Resign if there's a 'Yes' Vote - 2nd July 15
The Student Loan Bubble: Gambling with America’s Future - 2nd July 15
Inflation Is Lurking, but This Asset Can Protect You - 2nd July 15
Three Total Wealth Stock Investor Tactics You’ll Need Because Greece Isn’t Over - 2nd July 15
Why This $5.6 Trillion Investor Profit Boom Is Set To Take Off - 2nd July 15
Greek Debt Crisis: "Too late to prepare now" - Video - 2nd July 15
Guaranteed US Dollar Death Dynamics - 2nd July 15
The Greek Stress Test & The Reality Of Incremental Changes - 2nd July 15
Forget Drachmas Greece Syriza Government Could Instruct Central Bank to Print Euros! - 2nd July 15
Greece Debt Crisis Trigger for Stock Market Crash or Bull Rally? Video - 1st July 15
Gold Stocks Break Below 2008 Low - 1st July 15
SPX Stock Market Retracement May be Over - 1st July 15
Silver Tunnel Vision 'Experts' - 1st July 15
Gold And Silver - Monthly, Quarterly Ending Analysis - 1st July 15
Europe’s Controlled Demolition - 1st July 15
The End of Dow 18,000; Bailouts No Longer Extended  - 1st July 15
Athens Mayor: Greek Government Should Resign - 1st July 15
China Stocks - This Is What a Bubble Looks Like - 30th June 15
Stocks Plunge on Greece Euro-Zone Financial Armageddon Blackmail - 30th June 15
Greece Crisis Shows Importance of Gold as Europeans Buy Coins and Bars - 30th June 15
Stock Investors Express Route to Profits in the Healthcare Sector - 30th June 15
Beyond the Greek Impasse - 30th June 15
Gold GDXJ : Impulse Move Pending - 30th June 15
Fed Interest Rate Increase Could Be Best Thing to Happen to Gold - 30th June 15
Marc Faber - Greece is Basically Bankrupt - 30th June 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

China Stocks - Where are they going?

The Economy Does Not Always Drive the Stock Market Trend

Stock-Markets / Stock Markets 2010 Mar 18, 2010 - 10:23 AM GMT

By: Claus_Vogt

Stock-Markets

Best Financial Markets Analysis ArticleIn the long run, economic development and — especially — corporate earnings are the main drivers of stock market performance. But this relationship is very loose. It becomes tight only if your time horizon is measured in decades.


Shorter term, economic development and corporate earnings are often relatively inconsequential for the stock market. Why? Economic changes are superimposed by changes in the fundamental valuation of the stock market. That means investors’ perceptions and their willingness to pay for risk and income streams are unsteady. Over time, investors are paying very different prices for the same earnings or dividend streams.

Fundamental Valuations Are Fluctuating Wildly

Look at the following charts showing the S&P 500 since 1926, the Price-Earnings-Ratio (PER) and the Dividend Yield. As you can see, both fundamental ratios have been fluctuating wildly. The PER was as low as 7 and as high as 20-something.

During the stock market bubble of the late 1990s the PER even rose to more than 40. And during the past quarters the PER rose significantly higher. Obviously investors came to the conclusion that the dramatic slump in corporate earnings, especially in the financial sector, was an extreme outlier which should not be taken into account to value the stock market.

S&P 500 Index, Kurs-Gewinn-Verhältnis, Dividendenrendite, 1926 bis 2010

Comparison Chart

Source: www.decisionpoint.com

These severe fluctuations mean that dividends, earnings, and cash flows are fetching very different price tags in different times. A simple example may demonstrate my point: Suppose the PER is as low as 7 and the stock market index is at 100 points. Keep earnings constant, but let the PER rise to its upper range at 21. Now the index rises from 100 points to 300 points. Let’s go a step further to a bubble PER of 42. In this case, the index doubles to 600 points. Same index, same companies, same earnings, but very different Price-Earnings-Ratios lead to this bandwidth of 100 to 600 points. And this bandwidth has been a reality in the past 30 years!

This example makes clear how secondary the economic background and even corporate earnings are to analyze and evaluate the stock market. But there is one major exception to this rule: Recession.

You Better See Recessions Coming

Whenever a recession is in the offing, you have invaluable economic information at your hand. This information is extremely important for the stock market and for your investment strategy. Why? Every recession has been accompanied by a severe stock bear market. That’s why I constantly look at my leading economic indicators, which enabled me to predict the recessions of 2001 and 2007-2009.

Right now they do not yet forecast an imminent recession. Hence, in the current situation it is ideal to painstakingly analyze the latest economic data release du jour. It may be fun to do so for those inclined. But it doesn’t help you in forecasting the stock market. I rate this regular data release ballyhoo as noise you can easily ignore.

History tells us that the economy is vulnerable to a renewed and relatively swift turn for the worse.
History tells us that the economy is vulnerable to a renewed and relatively swift turn for the worse.

That doesn’t mean I do not follow economic development. But I am only interested in deciding whether the incoming data is starting to point to the end of the current economic rebound or not. Everything else is inconsequential.

We are living in a post bubble world. And history tells us that the economy is vulnerable to a renewed and relatively swift turn for the worse in this environment. After all, this rebound is the result of massive governmental stimulus, bail outs and market manipulation by the Fed.

It follows that this rebound is dubious and fragile. But even in this scenario the leading economic indicators will pick up some deterioration before the next down wave gets started. Currently, they are doing nothing of the sort.

Best wishes,

Claus

Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


© 2005-2015 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

Biggest Debt Bomb in History