The €uropean



Chart of the Day

Is Wall Street cheap, expensive or fair valued?


 Here is a chart which may help you to give an anwer.

A long-term chart suggests Wall Street is fair-valued, but not very cheap or excessively expensive.

A few days ago, I ate dinner in Paris with Paul Horne, an independent market economist, after spending a life at Smith Barney.

While dining out at Aux Anysetiers du Roy, on the Ile Saint Louis, he showed me the chart aside, depicting the S&P stock price since 1900.

He noted that at the bottom of last March 9, when the S&P 500 touched 676, the stock market had just come back to the secular up-trend. Paul had neither a bullish or a bearish bias, but argued that this is the fourth secular bear market since 1900. In the other three cases the market overshot on the down side, falling much lower than the trend. If the pattern holds, the S&P 500 might fall to 600 or even 400, or, alternatively, the market could experience a long-term sideways movement.

"All depends on the economy," told me Ed Yardeni a few days later. I talked to the famous guru over the phone regarding an article I was preparing for a magazine. He said: Where we go from here hinges on the outlook for the economy. My view is that this is a deep deep recession; it would have been a depression, except for very stimulus policy responses around the world. And so I still believe it will not be a depression, in which case, a 50% collapse in stock prices is as bad as it can be."

Yardeni admitted he was personally hurt by the bear market and that "very few people missed the rout."

"But if you still have purchasing power”, he went on, “I would say: start buying now and keep buying for the next 6-12 months and 5 to 10 years from now you'll be very profitable. Of course, if I am wrong, and this is a depression, stocks may fall 70-90% from the all time high. In that case, you may find stocks at even more attractive prices.” The decision - as always - is up to the reader.

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