Is There a Connection Between Stock Market Valuations and Wealth Disparity?
CAMS Weekly View from the Corner – Week ending 9/17/21
September 20, 2021
Market prices at any given time tell us very little about how the stock market is valued. Realizing the stock market is a collection of businesses this makes sense. Similar to if you own a business, have ever considered buying a business or have ever sold a business the first thing you look for is context of said business when considering a purchase/sale price. Context aids us in valuing the business relative to what the business does, its general financial condition, its developed goodwill in its industry, it’s historical trend rates of sales and profits to name only a few. There are many measures, i.e. contexts of which to place a business under review and hence determine its value. Similarly, when valuing the stock market as a whole there are various measures we can use to place the price into context. Just like in consideration of purchasing or selling a private business what we are after is does the offer price make sense. Can it be economically/financially justified on a going forward basis to the point that it will work out well for you the purchaser.
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Ron Griess over at The Chart Store compiles an excellent data set of “hours worked” analysis for various areas of society and markets. Above is an example of these data sets for the S&P 500 Index with our red line annotations added for emphasis as well as time segmentation. The above data simply takes the S&P 500 Index and divides it by the average hourly earnings of production workers which currently stand at $25.99 an hour. As an aside, this seems generous, pragmatically speaking. How many production workers do you know who make $26 per hour? The point to our aside is even with this generous current hourly wage our current stock market is in the stratosphere relative to its history. The above dates back to 1964 for broad historical perspective. The overriding message of the above, in its wholeness, is a multi-decade calmness (red horizontal line encompassing three decades) followed by a couple of decades of general valuation insanity with our current experience representing the crown jewel of said insanity. What Does This Mean By taking the price of the S&P 500 and dividing it by the average wage rate we conclude how many hours of work it takes the general citizenry to buy the S&P 500. Currently it takes 174 hours of work to purchase the S&P 500. This represents over five times the number of hours worked it took on average to purchase the S&P 500 through the 60’s, 70’s, 80’s and a bulk of the 90’s. It is safe to say that economic robustness (defined by the citizenry’s comparative growth in wages) has not kept up with the stock market. Said differently, the stock market is far ahead of the citizenry’s underlying economic health and vibrancy that ultimately supports its member businesses sales and profits. Inherent to using the above data as a stock market valuation measure it also rings a bell of the wealth disparity that has unfolded in this century in particular. The Printing Press In the previous two decades the Federal Reserve has gone off-the-rails with their balance sheet expansion which is often simply identified as their printing press operations. In the wholeness of the two previous decades the Fed has increased their balance sheet by nearly 13 times! This extreme monetary expansion has inflated nearly everything in society to levels unimaginable just twenty years ago. If we focus on the previous ten years or so only, the general story is even more extreme in its overall impact across the societal and asset market board. Think inflation. The inflation for the bulk of these two decades, in particular the previous ten plus years has been centered in asset prices of all stripes with stock prices being the epicenter. Simultaneously, economic growth has not kept pace with the rate of inflating stock prices nor of the Fed’s money expansion. With this, the citizenry’s wages have not come close to keeping pace. Hence the above chart in its fullness and then the extreme readings developed toward the right side of the chart. To the degree a household has exposure to asset prices is often the degree they participated on the positive end of the printing press result. Wage growth alone has not won the day, and worse, when factoring in price inflation of goods and services, have fallen behind. The Fed’s answer current day: Keep the presses rolling – price inflation, asset inflation, home price inflation negative wage growth rates when pricing in inflation be damned. Besides, said inflations are transitory as they continue to offer the citizenry. Bottom Line If all of the above seems esoteric and unimportant sadly it is not. That is, the above chart is corroborated by other valuation measures in particular when the economy is added into the mix for valuation context. Are you seeing a theme here? The stock market is far and away out in front of underlying economic activity and has been for the bulk of this century which leaves it vulnerable to sudden and hefty downturns. This is known as “priced to perfection” and when perfection is no longer present or perceived to be all hell can and does break loose to the downside. Do we really think the above chart will continue to go straight up unimpeded to eternity while we are already at levels never imagined when looking at this six decade data chart? If yes, carry on. If no, consider your options. For our part, at this time, we are cautiously positioned and mentally concerned. We have chronicled for months now how the stock market, inside itself, has been blah. In recent weeks it has gotten shaky. Is this the beginning of something to the downside or merely a few tremors that will amount to nothing? When operating in extremely valued markets and clarity is uncertain, caution is warranted. I wish you well…
Director, Market Research & Portfolio Analysis
H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.
This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.