I have seen some people predicting much lower equity returns due to a high P/E 10 ratio from Shiller et al. This also seems to be used by some people to question the Fire Calc return data because some of the best returns were from times when S&P P/E ratios were sub 10 and we have not seen those levels for a long time.
What do you all think of these arguments? Is it different this time?
Some things that I see as supporting higher P/E ratios are:
1. Lower income tax rates and lower capital gains rates - The top income bracket peaked at 92% in 1952 and the capital gains rate was 39% in 1976
2. Lower commisions - since commissions were deregulated the cost to trade has come way down. My Money magazine said that in 1972 the average fund charged 8.75% load and the average stock commision was 1.3% of the value for each buy and sell. Don't know what they were historically, but probably as high or higher.
3. Lower spread - Electronic trading vs. market makers, decimilization, more liquidity and volume has reduced spreads by a lot. I don't know if there is any historical data on this, but you can still see a huge difference on thinly traded stocks or closed end funds. I imagine traders got nicked for a few % more in the past than they do today.
4. Increased demand and volume - Steady inflows from 401k and pension plans set a higer baseline. Money stated that MSFT trades more shares in a day now than the entire NYSE traded in a week in 1972
I am sure you can think of others or offsetting trends, but it seems to me that these trends would tend to make the "realized" cash flow higher for the same earnings and raise the P/E of the market from historical averages. It still needs to be grounded in reality as 2000-2002 showed, but the S&P trading at 17x trailing and 15x forward earnings (before the recent rally) does not scream to me "overvalued" because in 19xx the P/E was lower.
What do you think?
What do you all think of these arguments? Is it different this time?
Some things that I see as supporting higher P/E ratios are:
1. Lower income tax rates and lower capital gains rates - The top income bracket peaked at 92% in 1952 and the capital gains rate was 39% in 1976
2. Lower commisions - since commissions were deregulated the cost to trade has come way down. My Money magazine said that in 1972 the average fund charged 8.75% load and the average stock commision was 1.3% of the value for each buy and sell. Don't know what they were historically, but probably as high or higher.
3. Lower spread - Electronic trading vs. market makers, decimilization, more liquidity and volume has reduced spreads by a lot. I don't know if there is any historical data on this, but you can still see a huge difference on thinly traded stocks or closed end funds. I imagine traders got nicked for a few % more in the past than they do today.
4. Increased demand and volume - Steady inflows from 401k and pension plans set a higer baseline. Money stated that MSFT trades more shares in a day now than the entire NYSE traded in a week in 1972
I am sure you can think of others or offsetting trends, but it seems to me that these trends would tend to make the "realized" cash flow higher for the same earnings and raise the P/E of the market from historical averages. It still needs to be grounded in reality as 2000-2002 showed, but the S&P trading at 17x trailing and 15x forward earnings (before the recent rally) does not scream to me "overvalued" because in 19xx the P/E was lower.
What do you think?
