In yesterday’s post we discussed the idea of valuing the stock market like a bond, which is inspired by the academic research and the historical record. Today, we apply the concept to the real world by plugging in some numbers in an effort to develop a bit of perspective on estimating the long-run return for the stock market. It’s an imperfect art, to be sure, and one that ultimately requires far more detail than we can provide here. But every journey starts with a first step.
VALUING THE STOCK MARKET AS A BOND
No one should confuse stocks with bonds, but there’s a case for valuing equities as if they were fixed-income securities. There are several caveats, of course, but that’s always true with financial analysis. The question is whether there’s anything to learn when it comes to analyzing stocks as would-be bonds? Yes, although it’s not a silver bullet, nor is it helpful for short-term trading. And to the extent we do so, this valuation approach should be used simultaneously with other techniques. That said, there’s something to be said for taking a page from the world of fixed-income when assessing the stock market.
WHY THE GOLDMAN & PAULSON SAGA SOUNDS FAMILIAR
Yesterday’s news that the SEC charged Goldman Sachs with “defrauding investors” for selling a subprime mortgage product is eerie because much of the process that created it was profiled in last year’s widely reviewed book The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History
GOLDMAN TAKES A HIT…
Wall Street is a shadow of its former self, and not just because of the financial trauma in late-2008. Technology has long been reducing the relevance of big-city financial centers. Much of what passed as standard operating behavior among previous generations of bankers and money managers working in the financial canyons of New York, London and other cities can now be accomplished in the hinterlands, and probably at a lower cost. But if the writing has been on the wall for some time, it may be accelerating with today’s news that the SEC has charged Goldman Sachs with a rather large fraud in regards to its dealings with the subprime mortgage market. (Goldman denies the charges and claims the government’s case is unfounded.)
A RECOVERY IN HOUSING?
With each new data point, it’s clear that the economy is no longer contracting. The signs have been bubbling for months, and today’s update on new housing starts and building permits offers another round of statistical support. But while it’s tempting to conclude that the economy’s poised for a robust, sustained run of growth, that’s still premature. As we’ve been discussing for much of the past year, the time gap between the end of economic contraction and economic growth is likely to be longer this time. In turn, that means that the recovery is vulernable to a fresh bout of weakness once the initial bounce fades. That’s not fate, of course, but neither is it far beyond the pale of possibilities, given the breadth and depth of the Great Recession’s lingering complications.
JOBLESS CLAIMS JUMP
The economy continues to recover in a number of key areas, but it’s still not obvious that the labor market has joined the party. Yes, the latest nonfarm payrolls report was encouraging, but today’s labor market news on new filings for unemployment benefits leaves us wondering (again) if the recent end of job destruction will quickly bring job creation.
INFLATION? DEFLATION? OR SOME OF EACH?
Today’s update on consumer prices for March suggests that inflation remains tame. Is it too tame?
Some analysts think so. In fact, worries over deflation are again popping up in economic discussions. Didn’t we thrash the deflation beast last year? Maybe not. One reason for thinking that inflation is the bigger threat in the years ahead is the massive reflation program that’s been job one at the Federal Reserve, aided and abetted by the profligacy of fiscal policy.
DEBATING THE DATING OF THE BUSINESS CYCLE
Is the recession over? No, or at least not officially, according to the National Bureau of Economic Research, the non-profit group that makes the official pronouncements on business cycle dates. In a statement yesterday, NBER said it was too soon to mark the end of the contraction that began in December 2007.
HOUSING: THE OTHER BIG PROBLEM
The hefty 8-million jobs lost during the Great Recession won’t easily or quickly return, as Robert Reich reminds in today’s Wall Street Journal. But at least there’s hope that the March gains in the labor market signal that recovery has begun. Maybe. Even if that’s true, questions still abound for the other elephant weighing on the economy—housing.
DEBATING THE ECONOMIC RECOVERY: IS IT REAL?
Since the Labor Department released the March employment report, which delivered the first substantial gain in nonfarm payrolls since the recession began in December 2007, the debate about the strength of the economic recovery has gone into overdrive. A selective sampling of the conversation…