Don’t Expect Markets Owe You Anything

Early postwar years, the market dealt out death once it sold above 15 times earnings, particularly in the mid-sixties. Ten times earnings was a much better number to buy into stocks but rarely held for very long. Relatively high valuation in the sixties reflected exuberance following AT&T’s invention of the semiconductor and Xerography’s taking over document transmission and reproduction. With no new toys, Polaroid was about to fade out. 

Note this  chart on the S&P 500 covering early postwar years into the mid sixties, seventies. It peaked at 18 times earnings and then a long fade away, mid-sixties to early eighties. 

I was operating then and trying hard to hold onto capital. I crossed a million early sixties and never looked back to my scratchy years. Syntex, Xerox and Fairchild Camera were my big winners. 

They were all research speculations not flippant trades. I never owned a GDP piece of paper like GM, DuPont and U.S. Steel. They were owned by another class of shareholders who believed in America year round. I avoided managements who donned starched white collar shirts. 

Stocks peaked at 25 times earnings almost 25 years ago, then coursed to a more normalized ratio of 15 times earnings a decade later. Valuation compressed as low as 10 times earnings in the recession of 2009-2010. At least historically speaking, owning the market at 15 times earnings proved a reasonable working number. 

Because stocks and bonds can thrive in a deflationary setting, the leveraging of financial assets can work for many years but they suddenly collapse as new macro forces unfold along with inflation (stagflation). 

Sometimes, you can blame the FRB for standing by during the leveraging of financial assets, then intervening late, after every cream puff was busy making profitable trades. 

Today, the shoe is on the other foot. We’re awaiting Fed stimulation in the money supply and lower Fed fund rate as well.