The Unknown Ideal

CNBC, Fox News, and others are blowing a lot of gas around about the Dow Jones Industrial Average's brief record-high moment this morning, and (predictably, comically) some commentators are even giving credit to George W. Bush.

A tiny bit of perspective: The US stock market is doing well, but when measured by the S&P 500 (a much better measure than the price-weighted, Dow Industrial average of only 30 stocks), which closed at 1336.50, is still below its level of 1,342.90, where it was when George W. Bush took office. Even factoring into returns the S&P's annual dividend yield of 1.8%, an investor who bought an S&P 500 index fund on the first day of the Bush administrations would have failed miserably to even match the rate of inflation by yesterday's close.

The stock market has historically done much better under Democratic administrations than under Republican administrations, as Professor Jeremy Siegel himself a Republican booster (if only for the sake of his precious dividend tax cut), showed in the last edition of Stocks for the Long Run.

Forbes has noted that the US economy has historically done better under Democrats. And the Stock Trader's Almanac provides this handy comparison of the Dow under Democrats and Republicans:

DJIA, 1981 - 2004
Republican years Avg. annual change: 6.9%
Democratic years Avg. annual change: 13.3%

Right-wingers have nothing to crow about with regard to the level of US stock market. Yet they still crow. Remember: their community is not reality-based.

Atrios kindly points us to this Think Progress report that helpfully reiterates, in response to Fox News nonsense, that the Bush tax cuts have done nothing for the US stock market:

A 2005 study by four Federal Reserve Board economists “fail[ed] to find much, if any, imprint of the dividend tax cut news on the value of the aggregate stock market.” According to a Wall Street Journal article, the study concluded that Bush’s tax cuts were “a dud when it came to boosting the stock market.”

Analysts at the Tax Policy Center found that the link between capital gains tax rates and stock market growth is “weak” and capital gains have historically risen with “little apparent effect on the stock market.”

Posted by The Unknown at 9:15 AM | Permalink

The Dow Industrials came within two points of their all-time high today, and the S&P 500 began to test the bounds of P/E-based "fair value", skittering just above the long-term average price-to-earnings ratio for the broad large-cap Index.

From the old Fed Model perspective, US stocks still look extremely undervalued compared with US bonds, but the Fed Model broke when low inflation and the intervention of foreign central banks began pushing medium-term US Treasury yields down.

On the topic of Treasury yields and the famous curve that charts those yields across the range of maturities, the Dallas Fed has some interesting thoughts (via Economist's View)

I should have the year-to-date asset class returns updated shortly after month-end. That will provide even more perspective on what's happening in the race of returns between stocks, bonds, and other asset types.

As Negativland advised, shop as usual and avoid panic buying.

Posted by The Unknown at 2:48 PM | Permalink

Barron's reader Al Connelly lays it out in the September 18 issue's Mailbag:

We should let Wal-Mart be Wal-Mart when Wal-Mart gets its hands out of our pockets. I want Wal-Mart to be in a free market, not get a free ride. We taxpayers are subsidizing Wal-Mart by providing benefits to their employees: We provide Medicaid, food stamps, Section 8 housing assistance, tax credits, and free and reduced-price school lunches. An August 2004 study by the University of Califromia Labor Center estimated that Wal-Mart cost taxpayers $86 million per year and that was just in California.

I will be happy to leave Wal-Mart alone when it pays its workers enough to keep them from taking my tax dollars. At that point, we'll be square. Yes, prices will then be higher at Wal-Mart. That's the free market.

Posted by The Unknown at 5:27 PM | Permalink

Tom Adams opined, following this morning's CPI report that Inflation-linked Savings Bonds, known as I Bonds will be bouncing back from their current 2.41% rate to yield somewhere in the neighborhood of 5 or 6% come the November adjustment.

This morning's CPI release for August showed inflation up 3.8% from a year ago. We now have CPI data for five of the six months between March and September that will be used to calculate the next I bond inflation component, which will likely end up somewhere between 4% and 5%.

Add that to the fixed base-rate of your own I bonds to determine what rate you'll get for the next six-month rate period. New I bonds will likely have a fixed base rate in the 1.0% to 1.4% range, for a composite rate that's most likely somewhere in the 5% to 6% range.

Posted by The Unknown at 10:27 AM | Permalink

Interesting that in the months that have intervened since I last updated the S&P 500 valuation spreadsheet the price level of that index of US stocks has risen from around 1250 to over 1300. One might ask then, are US stocks still a decent value?

Oddly the value appears even better than it did back in June due to a couple of factors: increased corporate earnings have kept the index's price-to-earnings ratio below the historical average (and well below the average of the past 10 years), and bond yields have sunk, making investments to most fixed income instruments far less attractive than investments in a broad index of stocks, at least to those who would compare conventional return prospects for those two asset classes.

What's more, the shrinkage of the gap between "as reported" corporate earnings and Standard & Poors' very strict measure of "core" earnings implies that investors are getting more for their money in terms of the top-line earnings numbers. Nice to see corporate earnings reports tightening to standards.

The Fed meets next week and it seems unlikely that they will raise short-term interest rates given the recent relative weakness in both commodity prices and economic data. The rest of the year could be good for U.S. stocks.

Posted by The Unknown at 2:36 PM | Permalink