Robert O. Welk RowTek Economics
Trends
of stock prices reveal valuable insights into the fundamentals that are
determining them. When prices proceed along a line, with only
minor variations from that line, they reflect expected earnings and
appreciation for the equities, supply and demand for equities, and the
level of confidence of investors. The establishment of a trend
takes several years. Any wide variation from the trend means that
some of the fundamentals have changed. Such a movement should
alert the observer to examine carefully why the deviation has occurred.
The time axis for the following chart allows for 20 years of monthly average prices of S&P 500 daily closings. There are two different trends shown on the chart. The long term trend shown for the width of the chart is based on the interval 1978-1996. (The trend is shown projected ahead for the years 1997-2009.) Those trend years, yielding the 11.3% annual increase were optimum for the economy. They included the Reagan tax cuts, end of the cold war, personal computer growth, birth of the internet, and all the spin-off businesses.
The chart shows clearly the bubble in stock prices which developed in the late 1990's, and the subsequent collapse. The monthly peak in stock prices, as measured by the S&P 500, was August 2000 (1485.46). Prices then declined irregularly for the next 30 months, to 837.62 in February 2003. The decline from the peak was 44%. ( In October 2008 prices at 968.8 were well below that high, set more than eight years ago, by 35%.)
From the low in February 2003, stock prices increased rapidly through December '03 by 29% to 1080.64. After that, prices gained more slowly and established a new trend, well below the previous long-term trend. A trend fit to the months January 2004 through September 2007 has a slope of 9.2%. Prices were relatively close to that new trend line through fall '07. By January '08 it was obvious that prices were deviating away from that trend to the downside when they had fallen 10% below the trend. By late spring it appeared that a "bear market" was underway, well before the collapse in the credit markets which occurred during the past two months. In October '08 the monthly average was 37% below the recent October '07 high(1539.66) and 41% below the 9.2% trend. This recent 9.2% trend is probably history. Consider that in order for prices to return to that trend line in December '09, prices would have to increase 86% from October '08 levels. In view of the outlook for the real economy in 2009, and earnings, that is not likely.
END
Copyright © 2008 RowTek Economics. All rights reserved.
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The time axis for the following chart allows for 20 years of monthly average prices of S&P 500 daily closings. There are two different trends shown on the chart. The long term trend shown for the width of the chart is based on the interval 1978-1996. (The trend is shown projected ahead for the years 1997-2009.) Those trend years, yielding the 11.3% annual increase were optimum for the economy. They included the Reagan tax cuts, end of the cold war, personal computer growth, birth of the internet, and all the spin-off businesses.
The chart shows clearly the bubble in stock prices which developed in the late 1990's, and the subsequent collapse. The monthly peak in stock prices, as measured by the S&P 500, was August 2000 (1485.46). Prices then declined irregularly for the next 30 months, to 837.62 in February 2003. The decline from the peak was 44%. ( In October 2008 prices at 968.8 were well below that high, set more than eight years ago, by 35%.)
From the low in February 2003, stock prices increased rapidly through December '03 by 29% to 1080.64. After that, prices gained more slowly and established a new trend, well below the previous long-term trend. A trend fit to the months January 2004 through September 2007 has a slope of 9.2%. Prices were relatively close to that new trend line through fall '07. By January '08 it was obvious that prices were deviating away from that trend to the downside when they had fallen 10% below the trend. By late spring it appeared that a "bear market" was underway, well before the collapse in the credit markets which occurred during the past two months. In October '08 the monthly average was 37% below the recent October '07 high(1539.66) and 41% below the 9.2% trend. This recent 9.2% trend is probably history. Consider that in order for prices to return to that trend line in December '09, prices would have to increase 86% from October '08 levels. In view of the outlook for the real economy in 2009, and earnings, that is not likely.
END
Copyright © 2008 RowTek Economics. All rights reserved.
BACK TO MAIN PAGE