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S&P 500 is cheaper today than almost every month in past 137 years

 

Levi Folk, Financial Post 

Published: Wednesday, March 04, 2009

 

 "In the long run we are all dead," was the famous remark of John Maynard Keynes, right, but these days focusing on the short run makes us wish we were. The stock market is undoubtedly cheap based on long-term historical examples, and investors are wise to commit money to the market in increments over the next few months.

 

Each day brings more dire economic news that could lead to investor paralysis. Both the housing and banking crises in the U. S. were excellent leading indicators of the stock market's slide. However, investors who await the economic recovery will have missed the bottom. Investors with a long investment horizon should commit money slowly as the market falls.

 

The U. S. market is undoubtedly undervalued based on the S&P real value index as calculated by Charles Dumas of Lombard Street Research.

 

The S&P 500 -- with dividends reinvested and adjusted for inflation -- has appreciated at a steady trend rate of 6.75% over the past 137 years. Currently it is 50% below trend, making it cheaper today than almost every month (26 out of 1680) over this entire period.

 

In 1932, the market fell to 60% below trend. So in the worst-case scenario for the economy based on historical comparisons, investors could have another 10% of near-term pain. The more likely outcome is a severe economic recession in line with the early 1980s and on that score the market is just shy of the value discount seen in 1982.

 

Investors would be wise to stop shoe gazing and start buying the market on pullbacks, which lately is most every day.

 

It could take years for the recovery to see the indexes return to trend, but returns have proved best when investors bought in the thick of the crisis when the market was far below that trend.

 

 

 

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