From: hal@finney.org
Date: Thu Oct 21 1999 - 13:32:01 MDT
I tried to extend their chart for the next three years, 87, 88, and 89.
These are S&P 500 closing prices from www.iqc.com.
1/2/86 209.57
1/2/87 246.43
1/4/88 255.94
1/3/89 275.31
1/2/96 620.73
1/2/97 737.01
1/2/98 975.04
1/4/99 1228.10
The corresponding ten year ratios are:
1986 2.96
1987 2.99
1988 3.81
1989 4.46
Unfortunately I don't know how I could get the data to calculate the
30 year average earnings of the S&P companies. However over a four
year period the average shouldn't change much, so I will ignore it and
estimate the X axis movement purely on the basis of the ratio between
the 1986 value and the values on the following years.
Reading from the chart, the X axis value for 1986 is about 15, and
scaling it upwards for the following years we get:
1986 15
1987 17.6
1988 18.3
1989 19.7
When I plot these, they make a beeline upwards to the right, ending a
bit above the "e" of "Log Scale" in the heading above the chart.
This line is outside the envelope which has been explored by previous
years. Visually it is very much out of place, a jarring upward lurch
at right angles to the long term trend line. I'm sure that if we
recalculated the regression the fit would be much worse today than it
was in 1986. (It would be interesting to know if the author has
revisited the issue since publication.)
It is well known that the market today has many characteristics which are
not typical of how it has behaved over most of this century. By most
conventional measures it has been overpriced for years. This chart
illustrates the same effect. The market in the last few years seems to
be defying gravity. We are literally off the chart. Whether and when
we will return to earth remains to be seen.
Hal
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