I am getting tired of the endless procession of permabulls who keep insisting that at a 13 times multiple, the S&P 500 is cheap.
The last time I heard this was in 2000, when NASDAQ multiples went from 100 to 50, on their way to 10. Before that, it was in Japan in 1990, when multiples went from, guess what, 100 to 50 on their way to 15. Some 20 years later, Japanese multiples are still at 15.
When I first entered the stock business in the mid seventies, typical equity earnings multiples were in the seven to eight neighbourhood. If you performed exhaustive stock screens, which then involved paging through endless reams of 10-k’s, newsletters, and tip sheets printed in impossibly small type, you could occasionally find something at a two multiple, the kind Graham and Dodd wrote about.
Anything over 10 was considered outrageously overpriced, fit only to be sold on to retail investors. This is when the prime rate was at 6%. The selloff we saw this week is consistent with my long term view that we are permanently downshifting from a 3.9% to a 2%-2.5% growth rate, and the lower multiples this deserves. If you had any doubts, take a look at the $24.7 billion in May equity mutual fund outflows, versus the $14.2 billion sucked in by bond mutual funds. I’m convinced that if the circuit breakers had not been installed, we would have been visited by another flash crash this week.
I shall now throw all modesty and humility to the wind, and refer you to my January Annual Asset Allocation Review screaming from the rooftop that “I’d rather get a poke in the eye with a sharp stick than buy equities,” by clicking here. I then direct you to my piece warning that a right shoulder for the S&P 500 was coming (click here for “Bring on the Right Shoulder” ).
And finally, read the bad news by clicking here that the right shoulder was in. Whenever I am particularly in tune with the market spirits, I inevitably get inundated with a torrent of questions about what happens next. It seems at this point that my original prediction of 950 in the SPX is looking good, and that an overshoot to 900 is possible. I think we are in a long term 900-1200 band that lower growth demands, and that we are trending towards the bottom end of that range.