Stocks Affordability
that matters: “Which investment is best today,
October 1987
0% -25% -50% -75% -100% 25% 50% 75% 100%
Dot-Com Bubble 2000
relative to the other investing choices?”
So please take a look at the chart to the left. It’s my chart of stock market
affordability . Like housing
Market Bottom 2009
Source: Bloomberg
affordability, I look at three things here: stock prices, stock earnings, and interest rates. Above is what it looks like when you put it all together. As you can see, my indicator shows that stocks were dangerously overpriced in 1987 – right before Black Monday hit on October 19. And you can also see that stocks were extremely overpriced at the peak of the dot- com bubble in 2000. When were stocks the cheapest by this measure? After the collapse of Lehman Brothers, near the stock market bottom of 2009. This means in hindsight, my stock market affordability indicator did a good job showing peaks in 1987 and 2000, and finding the last great stock market bottom. So where do you think we are today, 10 years after that market bottom in 2009? Wouldn’t you think – after 10 years of soaring stock prices – that stocks would no longer be affordable? Wouldn’t you think that stocks would be extremely expensive?
2010 2007 2004 2001 1998 1995 1992 1989 1986 1983 1980
Yes, I’m fully aware that stocks have soared since bottoming out in 2009. And I’m fully aware of the chart I showed you at the beginning of this essay. The Nasdaq has practically soared straight from lower left to upper right over the last 40 years (with the exception of the dot-com bubble and bust in 2000). But I look at stocks differently... Once again, instead of just looking at price, I want to value stocks relative to interest rates. I want to look at stock market affordability. I look at stock values relative to interest rates because all investing is relative... If you could earn 20% interest at the bank, then you would have zero incentive to invest in the stock market. But if the bank is paying you zero percent, and stocks have averaged 8% a year over time, then you have an incentive to invest in stocks. Investing is all relative... Investors make decisions every day, asking the one question
American Consequences
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