A new model for valuing stocks may include higher valuations because the old paradigm is no longer valid, according to a research note from DataTrek Research Tuesday.
From 1950 to 2000, according to Nicholas Colas, co-founder of DataTrek Research, there was a fairly stable paradigm for stocks, regardless of the media, financial analysts and others who make their money to analyze every tick in the markets . he said.
What did the post-war stock market do?
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-1.04%
does it seem, in retrospect? Valuation of American stocks. United States They averaged about 15 times earnings per share, stock traders had about 5 to 8 times earnings and peaks were about 25 times.
Things started to change in 2000, says Colas. In the wake of the 2008 financial crisis, equities reached 10 times their profits, more than during previous recessions despite much more severe conditions. We don’t know what is behind the current crisis, of course, if it was the March 23 low on the S&P 500, or if there is something worse to come.
But we do know that there have been significant structural changes in the economy and the markets since 2000.
The first, and perhaps most important, Colas points out, are interest rates and the absence of inflation. “The average yield of the Treasury at 10 years
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0.701%
from 1960 to 2007 it was 7.0%, but since 2008 the average has been 2.6%, “he said. “Today it stands at 0.75%.”
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It is also remarkable: those responsible for fiscal and monetary policy react much more quickly to crises today than they did in the 20th century. In part, it’s just an easy-to-beat low bar: there was no Federal Reserve infrastructure or a history of responding to national crises from the Fed or the tax authorities in Washington during the first half of the century.
Related: The Fed will buy ETFs. What does it mean?
But it is also, for better or worse, because the markets expect activist monetary policy to keep the markets and the economy stable. In the wake of the coronavirus response, which now extends to fiscal policy, says Colas. “The infamous Fed put has become DC’s put.”
Finally, the composition of stock market indices and the economy is now more geared towards technology, which should offer higher valuations and returns than older industries, generally more industrial.
As Colas says, “We believe that the combination of cell phones, broadband Internet and Moore’s Law changes the calculation, both in terms of corporate return on capital and cash flow sustainability. “
Watch: Technological innovation is changing the world, and this fund manager is banking heavily on how it will work