Author Topic: Where should the market be based on historical norms?  (Read 2002 times)

FrugalSaver

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Where should the market be based on historical norms?
« on: March 18, 2018, 05:03:45 PM »
THinking back to 1999, the Dow hit 10,000 for the first time.

The market was over 14,000 in 2006

Then finally got back to the level around 10 years later and hit 18,000 in 2016

Today it stands at 25,000

Just putting a growth multiplier of 7% per annum from 1999, the market would be at about 36,165

At an 8% per annum, it would be 43,157

At the end of 2016, we had recorded one of the worst 18 year runs in stocks on record including an entire "lost decade+"

will be interesting to see how the business tax cuts work and the significant growths in employment numbers and how that affects the overall market.

My biggest fear right now is the fed and them raising interest rates too fast.

Fully 81 of the 84 OECD countries' economies are in growth mode which is unparalleled in the history of the globe. 

If policy can remain conducive to business growth and encouraging people to take reasonable risks, we could be in for some amazing times in the future.

ChpBstrd

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Re: Where should the market be based on historical norms?
« Reply #1 on: March 18, 2018, 08:26:31 PM »
Are you suggesting that the low-single-digit capital gains on stocks since 1999 mean:
1) we are "due for" higher ROI in the future?
2) low single digit ROIs, compounded, still lead to spectacular growth over time?
or
3) both: growth will be extra spectacular due to current business conditions?

Also, the tax cuts and interest rate rises are two sides of the same coin. The tax cuts will increase the national debt, so businesses and wealthy taxpayers get their liabilities decreased and the national debt is increased. It's a transfer of wealth from government accounts to taxpayers - essentially money-printing. The high rate of borrowing impairs the creditworthiness of the US government and adds supply to the bond market, raising interest rates. This is why we can't have both extremely low taxes and extremely low interest rates / inflation.

SeattleCPA

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Re: Where should the market be based on historical norms?
« Reply #2 on: March 19, 2018, 07:54:15 AM »
Wouldn't the market's valuation at historical norms equal its earnings times its average PE ratio?

Or restated another way (and just very roughly) if the average PE is 15 and its currently 30, the market's normal valuation would be half of what it is currently.

BTW, I think maybe your approach needs to include both dividends and share buy backs to get the return calculation right.

bwall

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Re: Where should the market be based on historical norms?
« Reply #3 on: March 19, 2018, 11:15:17 AM »
Why take 1999 as a baseline? Why not, say, 2003?

Are there 84 countries in the OECD? Or did I misunderstand something?

facepalm

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Re: Where should the market be based on historical norms?
« Reply #4 on: March 21, 2018, 11:58:40 PM »


Just putting a growth multiplier of 7% per annum from 1999, the market would be at about 36,165

It doesn't work that way.

Travis

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Re: Where should the market be based on historical norms?
« Reply #5 on: March 22, 2018, 10:28:18 AM »

Just putting a growth multiplier of 7% per annum from 1999, the market would be at about 36,165
...
Fully 81 of the 84 OECD countries' economies are in growth mode which is unparalleled in the history of the globe. 

The market doesn't grow at 7% per year like clockwork. It tends to grow at 7% over 10 year periods with a lot of deviation in between.

If current global growth is unparalleled, why are you suggesting the "historic norm" means a damn thing - assuming such a thing exists?  The market should be where the market thinks it should be.  No two years are alike nor should you expect the market to behave or produced a particular outcome.  There are far too many factors at play to do otherwise.

DS

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Re: Where should the market be based on historical norms?
« Reply #6 on: March 22, 2018, 10:37:34 AM »
Right where it's at.

Xlar

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Re: Where should the market be based on historical norms?
« Reply #7 on: March 22, 2018, 01:32:33 PM »

chadat23

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Re: Where should the market be based on historical norms?
« Reply #8 on: March 22, 2018, 01:53:55 PM »
Something to keep in mind is that "should be" implies a plan and intention on behalf of a designer, operator, or the like.

The way I see it, assuming the market isn't being actively guided or managed, the market shouldn't "be" anything, it just "is".

And I know that I'm ignoring the "based on historical norms", but even that implicitly includes a "the market 'should be' following the historical norms that I deem relevant".

boarder42

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Re: Where should the market be based on historical norms?
« Reply #9 on: March 23, 2018, 06:22:07 AM »
the market actually grows at 10-11% over long periods of time if we're going to compare where the market should be on any give start date just compounding from the past the 7% used is based on removing inflation which you wouldnt do when calculating growth from the past. 

but where the market should be as posted above is right where its at.  Picking a market peak and applying historical average returns like 1999 to it doest get you any real data - PE ratios would make more sense but trying to guess where the market should be is market timing


my current biggest fear for you based on your posts you've started and made in multiple threads is you're over analyzing things and paying too close attention to whats happening and will likely try to time the market and lose in the long run.  i could be wrong but posts like this tend towards that IMO. 

CBnCO

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Re: Where should the market be based on historical norms?
« Reply #10 on: March 23, 2018, 05:08:49 PM »
I think average P/E ratios are around 15.7 and current around 25, so if you use this metric the DJ should be around 15,000

I wonder how this market would be valued if interest rates where at historical norms? Hmmm...probably about 15,000!

boarder42

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Re: Where should the market be based on historical norms?
« Reply #11 on: March 23, 2018, 08:14:44 PM »
I think average P/E ratios are around 15.7 and current around 25, so if you use this metric the DJ should be around 15,000

I wonder how this market would be valued if interest rates where at historical norms? Hmmm...probably about 15,000!

Accounting practices have changed average pe ratios aren't really applicable at 15 anymore it's quite a bit higher.

marty998

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Re: Where should the market be based on historical norms?
« Reply #12 on: March 23, 2018, 11:20:44 PM »
Why is the Dow (a changing mix of 30 companies) relevant for this analysis?

Would you get the same result/forecast with the S&P 500?