Historical Results and Commentary
November 11, 2003
Holdings
|
|
Nov-03 |
|
1 |
F |
|
2 |
NBG |
|
3 |
YHOO |
|
4 |
NKE |
|
5 |
BA |
|
6 |
VRSN |
|
7 |
JDSU |
|
8 |
CAT |
|
9 |
JNJ |
|
10 |
NSM |
|
11 |
CA |
|
12 |
FNF |
|
13 |
MSFT |
|
14 |
TKC |
|
15 |
HMC |
|
16 |
CRYP |
|
17 |
X |
|
18 |
AAPL |
|
19 |
COP |
|
20 |
WB |
Performance of Individual Stocks For last 3 months:
|
Nov-03 |
|
|
FNF |
10.52% |
|
COP |
6.19% |
|
CAT |
5.26% |
|
NKE |
17.61% |
|
BA |
19.58% |
|
VRSN |
28.11% |
|
JDSU |
18.15% |
|
YHOO |
40.55% |
|
JNJ |
-4.58% |
|
NSM |
83.97% |
|
CA |
-5.87% |
|
F |
15.80% |
|
MSFT |
1.31% |
|
TKC |
5.69% |
|
HMC |
0.95% |
|
CRYP |
66.10% |
|
X |
43.04% |
|
AAPL |
9.56% |
|
NBG |
11.39% |
|
WB |
5.56% |
Total Increase (Decrease) since last quarter: 18.94%
Additions: None
Subtractions: None
Commentary: This quarter I will look at some historical data to evaluate the current level of the S&P 500[1]:
First, I would like to thank Professor Robert Shiller at Yale for making a wealth of data available. The particular dataset I use comes from http://www.econ.yale.edu/~shiller/data/ . Additionally, the BEA has a large amount of data available, going back to 1929 (Shiller goes back to the late 19th century). The link for the BEA data is: http://www.bea.gov/bea/dn/nipaweb/SelectTable.asp?Selected=N
First, let’s look at PE ratios in their historical context:
This chart shows two critical things:
- On average, PEs have crept up since 1929
- The current PE ratio of the S&P 500 of 25+ is extremely high in historical context
Of course, interest rates impact PE ratios, as higher discount rates lead to lower PE ratios and vice versa. The following chart compares PE ratios with long term interest rates:
The above chart seems to show two distinct periods. Prior to about 1970, interest rates and PE valuations seemed to move in tandem. After this inflection point, they decouple. The following two scatter diagrams show this with some more clarity:
In this regression, from 1929 to 2007, there is little correlation between interest rates and the PE of the S&P 500
In this regression, from only 1970 onwards, the relationship becomes pretty clear.
I’m not quite sure what to make of this. To some extent I feel we could be in a new paradigm, where interest rates and PE ratios will move in inverse motions to one another. This makes good theoretical sense, given the impact of interest rates on discount rates. However, this begs the question of why this relationship was not present before 1970. Also, if you believe, as I do, that globalization pressures put a de facto ceiling on how high US interest rates will rise, then perhaps we could accept that the current rise in PE ratios is due to a rosy outlook for future discount rates.
So, to summarize, I don’t know if historical PE ratios are terribly useful in analyzing the current level of the S&P 500. However, I feel that from a historical perspective, the current index is very high and perhaps overvalued by as much as 50%.
Back to Quarterly Commentaries
Historical Results and Commentary