Posts filed under “Investing”
Fed-Driven U.S. Stock Advance Leaves Grantham Waiting for Bubble
by David Wilson
(Bloomberg) — Adjusting U.S. stock-market indicators for Federal Reserve policy since the 1980s shows a bubble has yet to come, according to Jeremy Grantham, Grantham, Mayo, Van Otterloo & Co.’s chief investment strategist.
The attached chart highlights one gauge, Yale University Professor Robert Shiller’s cyclically adjusted price-earnings ratio, that Grantham cited yesterday in a quarterly letter to shareholders. The P/E is based on average earnings for the previous 10 years, rather than four quarters of profit.
Shiller’s ratio averaged 24.4 from August 1987, when Alan Greenspan was first appointed Fed chairman, through last month. The period was marked by “the Fed’s habit (as in ‘addiction’) of pushing the market up in order to get a wealth effect,” or growth in consumer spending that reflects higher asset values, Grantham wrote.
The average P/E for what the Boston-based money manager defined as “the Greenspan era” was well above the comparable readings for earlier periods. Stocks were valued at an average of 14 times profit from 1900 to July 1987, as the chart shows.
Using the more recent figure as a benchmark would suggest stocks are “well on the way to bubble-dom but, clearly enough, not there yet,” Grantham wrote. The latest reading was 27.1 as of yesterday, according to Shiller’s website.
Grantham reiterated a view that the Standard & Poor’s 500 would reach a bubble at about 2,250, or 7.9 percent higher than yesterday’s close. He added that the threshold may be 5 percent to 10 percent higher after accounting for the Shiller P/E and another gauge, known as Tobin’s Q.
Tobin’s Q is a ratio of companies’ market value to the replacement cost of assets. The indicator is named for its creator, the late James Tobin, another Yale economist.
The remarkable life and lessons of Ronald Read, the $8 million janitor Barry Ritholtz Washington Post, April 26 2015 You may have read about the remarkable life and times of Ronald Read. He was the gas station attendant and lifelong resident of Windham County, Vt., who had quietly accumulated a portfolio worth…Read More
My Sunday Washington Post Business Section column is out. This morning, we look at the remarkable life and lessons of Ronald Read. It is a fascinating tale. Here’s an excerpt from the column: “You may have read about the remarkable life and times of Ronald Read. He was the gas station attendant and…Read More
In 2011, the Securities and Exchange Commission published a study, mandated by the Dodd-Frank Act, which concluded that all financial advisers and stock brokers should be placed under “a uniform fiduciary standard.” Basically this meant that brokers and advisers would have an obligation to put the interests of clients first and must disclose any conflicts of…Read More
Let’s get the scary stuff out of the way upfront: Cybercrime costs the global economy $575 billion annually, according to reports. The United States takes a $100 billion hit, the largest of any country, according to Politico. A report from former U.S. intelligence officials counted 40 million people whose personal information was stolen within the past year.Online theft…Read More
Stan Druckenmiller is betting on the unexpected. With one of the best long-term track records in money management, he is anticipating three surprises: Improving economy in China, Rising oil prices, and no Federal Reserve interest rate increase in 2015.
Stan Druckenmiller: Zero-Interest Rates Unnecessary
It’s tax day. Perhaps like millions of your fellow Americans, you waited to the last minute to file and will be trudging off to the post office or filing electronically later today. I’m not going to lecture about your procrastination. However, I am going to ask you two somewhat tax-related questions: 1. How much have…Read More
My Sunday Washington Post Business Section column is out. This morning, we look at how to avoid usual errors when you are managing your online banking, investment, and retirement accounts: Protect your assets by practicing common-sense cybersecurity. Here’s an excerpt from the column: “We spend most of our time in financial markets looking at ways…Read More