Four Golden Years And Going for More
Bucking dire predictions about the effects of impeachment, declining earnings and sky-high price-to-earnings ratios, the stock market has risen for the past six sessions in a row and could return more than 30 percent in 1999. In fact, the four years that come to a close this Thursday may be the best in history.</br></br>Throughout this bull market, naysayers have fretted about lofty valuations, but stocks have simply climbed higher. Today, for example, the P/E ratio of the Standard & Poor's 500-stock index, the best proxy for the broad market, is an astronomical 32, compared with an average of 19 over the past 12 years.</br></br>Could it be that prominent pessimists -- such as Robert Shiller of Yale and John Campbell of Harvard, who said two years ago (with the Dow at 6382) that stocks were at unsustainable heights, and the Economist magazine, which seems almost to be cheering for a crash -- are drawing conclusions from an antiquated model of the market? It seems so.</br></br>With a colleague, economist Kevin Hassett of the American Enterprise Institute, I have been working for the past year on a book that offers an explanation for the fabulous returns of recent years. We argue that stocks are moving now to correct a state of perennial undervaluation and that this strong upward trend will continue.</br></br>Our analysis is pretty technical, but it begins with a fact that economists have known for years: Over the long term, stocks are no more risky than bonds. Stocks and bonds should logically provide roughly the same returns, but stocks return far more -- an average of 11 percent a year, compared with just 5 percent for bonds.