patrick.net

Is your point that they are appropriately strongly correlated in the long term?

Or that stock prices have surged ahead of earnings lately?

This is just an interesting if accidental correlation.

As trillions and trillions were pushed into the system 2011-2013, all this QE has to come back into investments, which will push yields down (P/E up), so maybe we've departed permanently from the 1986-2008 regime of the S&P being ground on corporate profits, 1 pt of S&P 500 = $1B of profits.

Also, global capital mix also changes things, not all corporate profits are reflected in the S&P 500 any more.

Still, the chart does tell a story.

The 1970s saw a rise in profits but since inflation was so high (and the boomers so young) nobody bought stocks.

'86 ~ '98 saw a secular rise in profits as globalism and consolidation improved efficiencies and concentrated wealth.
Market saw a decade of nice gains then the late 1990s speculative bubble hit as everyone started chasing these gains, tulip-chasing was writing checks the profits couldn't cash 1998-2001.

2002-2004 was a correction period until Easy Al's 2001-2002 rate cuts, Bush tax cuts, & the housing credit bubble lifted all boats 2003-2007.

So the 1995-2002 mismatch visible in the chart may be replaying now and we're due a 25% correction back under 2000 in the S&P., or we've entered a different reality and 25 P/E ratio is the new floor not ceiling.

http://www.macrotrends.net/2577/sp-500-pe-ratio-price-to-earnings-chart

That's why they want tax cuts, to defer the crash into the 2nd term.

Replay of Bush 2001-2008 exactly.

But is the system going to pull back spending like what happened in 2007-2008?



https://fred.stlouisfed.org/graph/?g=f5Jz
real (2009 dollars) per-capita (age 25-54) durable goods spending

millennials are age 17 - 35 and thus only halfway into "prime" economic age.

their parents are going to be dying off this decade and next, passing on trillions in inheritances.

(I'm not a millennial but am certainly in a holding pattern until I get mine . . .)

Aside from the $1.5T in student loan debt they owe, millennials come into adulthood with no household debt.

(Recent grads have $50,000 in debt on average, but they have a borrowing capacity of hundreds of thousands more.)



shows debt service is at an all-time low, but this is more likely our increasing Gini making things look better here for the median folks than it really is

Any theories as to what the next crash will do to bond funds like NAC?

My limited understanding is that rates may be slashed to provide stimulus, which is good for bonds. But, market turmoil may cause bond repayment fears - a negative, downward price pressure.

of course corporate profits will reach record high every year when inflation is not taken into account.

The S&P correlates in the effort to anticipate rising corporate profits. The age-old discount is 6-8 months. The stock market is discounting new highs in profits.

anonymous says

The S&P correlates in the effort to anticipate rising corporate profits. The age-old discount is 6-8 months. The stock market is discounting new highs in profits.

This is why I love capitalism. It can turn poor peasants like me into middle class peasants.