We know that the late 1970's were a time of high inflation and rising interest rates but no catastrophic economic events in the USA.
We know that the early 1970's were a time of high inflation and rising rates but with catastrophic economic events – the inability of our oil infrastructure to replace a sudden hold back of Arabian oil.
COVID from a medical perspective is ongoing, but in stock trader's heads it is over. So my suggestion is we could compare what is happening now better to the late 1970's to 1982 than the early 70's.
In the late 1970's there were two notable stock market declines.
1)
Nov 1976 to Jan 1978 decline of 14.3% S&P500
The trailing 12 month PE of the average stock was around 9 at the start of this decline
2)
Dec 1981 to August 1982 decline of 18.5% S&P500
The trailing 12 month PE of the average stock was around 8 at the start of this decline
So stocks started 2022 with an average PE of 37, and now they are going to a PE of 8 or 9? Oh no, that is a historic crash including much more of a down market to go from here!
Not so fast. If you look at the M2 broad money available per person, it is $7,370 in 1977, $8900 in 1981 and $65,000 in 2022.
Throughout the same time, GDP per capita has grown less. We have grown GDP by a factor of 2.16 since 1977 and factor of 1.98 since 1981.
My interpretation is that people have more dollars to spend in the stock market per GDP unit.
We have a factor of 8.05 more money per capita since then, and a factor of 2.07 GDP increase since then. 8.05/2.07 = 3.89
Would it be that the PE's of stocks would tend to be higher now both at the highs and lows since we have more money to spend per person and based upon a GDP unit?
This takes the relationship that the value of a fair stock market increase over time should be similar to GDP increase.
At the start of these declines in 1977 and 1981, averaged together, the PE of your typical stock was 8.5.
An interesting stunt is 8.5 x 3.89 = 33.1 .
This 33 is close to the PE of 37 that stocks had at the peak of the market in January 2023.
In other words, if you put more money in each person's hands by a multiple for the same USA GDP unit, the valuations of stocks themselves will become more expensive on average in good times AND BAD.
The highs get more expensive, and the lows get more expensive in terms of the average stock's PE.
Right now in October 2022 our PE average has come down to 18.4. This is in the area of 2008, before the average company in the S&P500 lost money rendering the use of PE's nebulous.
But as bad as a gas shut off to Europe would be, we don't have Lehman brothers and AIG failing, and Wamu going under. So it would appear to me that we don't have much farther down to go before December when these gas shortages in Europe start.
Even so, there are stocks like Bank of America and Citizens Bank that have PE's now of 8 to 9, as if they were in the 1970's. Coupa is an example of a growing company that does not depend on the supply chain because they make software. There are plenty of opportunities at this level in my opinion.
Leave a Reply