Has the Bull Just Been Sleeping?
Most commentators have concluded that stock prices were so high in August that they inevitably brought about a crash that ended the bull market. The price-earnings ratio was 22.1, certainly high. But compare prices at the end of other bull markets: for instance, in 1961 the Dow Jones P-E reached 24.2. The Dow then climbed another 32% in the next four years after a falloff of its own in 1962.</br></br>And looking at the Dow Jones does not tell the whole story. In August 1987 it happened that many of the Dow stocks were those with the highest P-Es. But this has not always been the case in the past. In 1969 when the Dow had a P-E of 17, IBM (not then in the Dow) was 42 times earnings, Xerox was at 48 times, Avon 57 times, and Polaroid was actually at 71 times its earnings. Did August even begin to compare?</br></br>Another important method of telling whether the stock market is overpriced is to compare the total value of stocks with the nominal gross national product. At the August peak the value of stocks was 95% of GNP. This is high, but at the 1929 market peak it was 170% of GNP. For the market to have been that high in August, the Dow would have been at 4,627.</br></br>Another method of determining how high prices are is to take a previous high and adjust it for inflation. In 1966 the Dow hit an intra-day high of 1,001. Adjusting that figure for inflation today gives approximately 3,540, or a full 30% above the August peak.</br></br>Thus three significant stock-price indicators show that prices were not so high in August that the bull market had to come to an end. But the reasons to doubt the current bear-market consensus go beyond that line of analysis.