How the Stock Market Today Compares to History

This article was originally written in July 2002 for RC Peck’s Fearless Wealth Newsletter.

Looking to the past can be a tricky business. Some Wall Street advisors data-mine history to find facts and figures that “prove” their cases of today, to entice you to buy their products.

The following are issues that you may want to be aware of before you make your next money decision. I’m a strong believer that the past will always repeat itself as long as human conditions don’t change.

I think humans today are pretty much the same as they’ve been for the past 400 years. Greed and fear are still the two biggest motivators or de-motivators.  This letter isn’t about what will happen, but simply what has happened. I’m not in the business of prognosticating, but simply pointing out what should happen or what has a strong possibility of happening.

Let’s take a walk down history lane and see what we can discover about today’s market.

The “not so good” facts:
Fact 1) Secular bull markets start when P/E ratios are in single digits (P/E ratio means price-to-earnings, or the price at which the public is willing to pay for a dollar of the company’s profit. In 1982 (the start of the last bull market) the S&P 500 index sold for eight times earnings or a P/E ratio of 8. Today the S&P 500 P/E ratio is somewhere north of 30.

So unless we are in different times (and we are never in different times) this is not the start of a new secular bull market. By the way, ‘secular’ means a market making new all-time highs over a long-term period (decades), so for the S&P 500 that would mean breaking the 1550 level. As I write this letter the S&P 500 sits around 1030. Interestingly enough, markets historically peak when P/E ratios get to levels where they are today. The market is not cheap today.

Fact 2) The S&P 500 P/E ratio is already at pre-bubble days. The S&P 500 was north of 30 back in 1999, and we are there once again. We know how it ended the first time.

Fact 3) Historically, the total US stock market capitalization has been about 50% of the US GDP. Stock Market Capitalization is the number you’d get if you took all the outstanding shares of stock in the US and multiplied them by what they are selling for today. GDP means Gross Domestic Product and is the measurement of our economy.  Again, historically the total stock market capitalization has been half of the GDP.

Today the US GDP sits just above $10 trillion. In 1998 the stock market capitalization was at 185% of our GDP. Remember that the average has been 50%. Even today, three years after the top of the market, the total stock market capitalization is at 104%. The crash of 1929 happened with a market capitalization to GDP of 81%. This is not a cheap market.

Fact 4) Insider selling is at all time highs. Insiders are anyone in a company who is a director or above. When an insider buys or sells his or her own company’s stock, she or he is required to file a report with the SEC. Insider buying and selling is legal. What Martha Stewart did was not legal; more on that in a later newsletter.

The great fun about watching insiders is that they have better visibility then we do. So if they’re buying or selling their own stock, we may just want to take notice. Here’s the scary fact: For every one share purchased from an insider there are 64 shares being sold in this market. That’s a 64 to 1 ratio. This kind of selling is at an all time high. We have not seen this level of insider selling ever. The numbers don’t lie. If insiders are selling in droves, but are talking up the stock on earnings calls, I’d follow the money and not the story.

Fact 5) Out of the 500 companies on the S&P 500, about 300 have under-funded pension plans. This represents about $250 billion in under-funded accounts. That means that these 300 or so companies must redirect part of their earnings back into their pension plans to make up for the shortfall. This need not be done all at once but it does mean that fewer profits are going to you and me.

The “good news” fact
Fact 6) The price-action of stocks, which indicates the way stocks are moving. The direction is down but it looks like we may be at, or near, the end of this three year correction.

Now, I know what you’re thinking. This seems counter-intuitive to what I said in facts one through five. But it really isn’t. What we are in now is a traders’ market. Buying and holding is not necessarily a good idea right now. Buying and selling later with profits is a good idea. The reason this is not a “buy and hold market” is that the long-term market is still in a downward trend, while the short-term market is up. There is still a lot of pain in the market that hasn’t worked its way out yet.

Now is not the time to stick your neck out.

To protecting your wealth.

With regards,
RC’s Signature