Old B-school test question: “What’s the difference between a good company and a good stock?” The answer is “Valuation”. Against measures of long-term earnings power, the S&P 500 is clearly expensive at 25x trailing 10 year earnings (the Shiller PE). When compared to current earnings power of about $120, the multiple is 16x. That’s a perfectly reasonable level when the global economy is growing by 2-3% and modest inflation helps things along. It is, perhaps, not a multiple appropriate for a sloppy expansion in the U.S. and threats of deflation and recession elsewhere.
Jay-Z remarked “It was all good just a week ago” on the seventh track off 1998’s Vol. 2…Hard Knock Life album. While Hov was referring to a partners-in-crime relationship gone bad, he could’ve just as easily been talking about the fall of 2014 in the US stock market.
There haven’t been a lot of new noteworthy “headline” developments – just a rethinking of some old, nagging developments that don’t seem to be going away.
In the above quote from Friday, Nick Colas ponders the question of what the market’s current valuation should be, in light of our newfound interest in all the negativity surrounding America, if not quite inside of it. It’s a good question, and one that may be on everyone’s minds this weekend.
On Wall Street, they call this sort of thing a re-rating, though usually in regards to a specific company’s stock. Perhaps the market is in the process of being re-rated as a whole…