The Lindsey Report – February 2013

Article by, Cleat Lindsey

As of the writing of this letter (3/6), the Headline in the Wall Street Journal was “Dow Leaps to Record”.  The Dow finally eclipsed its highest level set back in October of 2007.  More broadly, the S&P 500 has not quite past its highest levels of 2007, but it has recently passed the 2000 highs.

These levels have led several clients to express concern that this may be “too much too fast”.  The question about too fast reminded me of a saved article from Financial Planning magazine (9/2008).  This article examined 12 S&P 500 corrections of 15% or more since 1950.  On average it took 14 months to fully recover, but looking at the two worst: 1973-74 (-48.2%) and 2000-02 (-49.5%), it took them 47 and 51 months, respectively.  Yesterday, March 5th, was four days shy of exactly 48 months.  It does not appear that this recovery was overly quick; rather, it seems about right.

The other concern of “too much” is really asking are valuations too high?  Unfortunately, on most any financial show, you could get people arguing “too high, too low and just right”.  To get a better handle on this, we can look at some data (my apologies if you hate data).

Over time equity prices should be a reflection of corporate profitability and future expectations.  One fairly broad measure of profitability is the combined P/E ratio for the S&P 500.  Basically, this ratio takes the price of the S&P 500 and divides it by the aggregate earnings of the 500 listed companies.   CNNMoney has the current P/E at 17.7, which is not much above the historical average of 15.5 (Reuters) and I believe well within normal trading ranges and definitely not high in the range.

It is also interesting to review some historical Gross Domestic Product (GDP) information.  This is the government’s measure of total economic output.  This gets interesting when we look back a ways.  Back in 2000 when the S&P was also over 1500, GDP was a little over 10 Trillion.  In 2007 it was 14.4T and today we are well over 16T.  GDP is currently up more than 60% from 2000 and over 10% from 2007  (Commerce Department).

In my mind, the recovery has not been that rapid and market values are reasonably in-line with where they should be.  So I don’t think this is “too much too fast”, I think it’s about right.


The opinions voiced are for informational purposes only and are not intended to provide specific advice to any individual.  To determine which investments are appropriate for you, consult myself prior to investing. Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly. 

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