By James B. Lebenthal, President Lebenthal Equity Management
The S&P 500 first closed above 800 in April, 1996. In the past week it has crossed below 800. Let's compare today and then.
In the first quarter of 1996, U.S. Gross Domestic Product was $7.6 trillion.
In the third quarter of 2008, the initial estimate for U.S. Gross Domestic Product is $14.4 trillion.
i.e. GDP has increased by 89%.
For the trailing twelve months ended March 31, 1996 operating earnings for the companies in the S&P 500 were $38.45.
For the trailing twelve months ended September 30, 2008 they were $65.22.
i.e. S&P 500 operating profits are up 70%.
At the end of 1995, there were 124,900,000 employed persons.
In the third quarter of 2008, there were 145,517,000 employed persons in the United States.
i.e. There are 20.5 million more working Americans.
The value of the Net Stock of Fixed Assets and Consumer Durable Goods in 1996 was $23.8 trillion.
In 2007 (data only available by calendar year), the value of the same stock was $46.6 trillion.
i.e. The value of the nation's asset base has almost doubled.
We could go on with a similar list, but the outcome would be the same. By many metrics our nation is far, far better off than it was the first time the S&P 500 saw its current value. Also, in no way have we attempted to quantify the improvement in quality-of-life during the last twelve years. Cars are sturdier, more fuel efficient, safer, and come loaded with standard features that cost extra in the last decade (side airbags, all-wheel drive, and anti-lock brakes anyone?). Every day brings news of new life-enhancing and life-extending medical procedures. You can get more computer in a laptop for $700 today than you could have for $5000 back then. How do you like your new iPhone and iPod? Remember, these did not exist in 1996.
Now, current events are certainly quite a bit different now than then. But think this through. Yes, unemployment is rising. It is unlikely to rise so high as to knock 20 million more people out of work. And profits will probably be down in 2009 vs. 2008, but they would have to go down 40% to match the 1996 level. Not only is that unlikely to happen, but if it did, it would probably be followed by an impressive bounce back to a normalized profit level closer to 2008 than 1996. We can't ignore either the massive write-downs caused by irresponsible and excessive financial sector lending. But the asset base quote above is a "net' number, as in "net of debt". All those debts being written down were used to build things, residences, office buildings, factories, cars, etc. Those assets did not go away. So the impairment of Mortgage-Backed Securities, Collateralized Debt Obligations, Structured Investment Vehicles, and similar ilk, doesn't affect the "net" stock of the nation's asset base. Yes, almost every financial institution in the US has written down a massive amount of its asset base, but those write-downs are offset by the write-downs of liabilities by owners of the homes, office buildings, car, and so on. Morally and ethically questionable, but a wash as far as the collective nation's balance sheet goes.
One thing has changed dramatically in between these two time periods, though. In 1996, the US stock market was in the midst of a once-in-a-lifetime bull market. The S&P 500 appreciated over 25% annually in the five years of 1995-2000. Now, the S&P 500 is mired in the latest leg of bear market that has lasted an entire decade. Think about the fact that large-cap US stocks have given no return other than meager dividends, in twelve years. This is not the normal state of affairs and long-term stock investors know this.
Let's put it a different way. By the end of the 1990's, we had had 20 years of average annual stock market returns of 17.8%, well above the long-term average of 11.5%. In the last twelve years we've had returns far, far below the long-term average. Reversion to the mean works in both directions. The naysayers in the late 1990's who warned that we were borrowing future gains to be paid back later were right. Thus, we received a bear market in 2000-2002. And right, too, are the optimists now who realize that the stock market is setting up for not just a rally, but a secular bull market. All indicators, from investor sentiment to implied equity risk premia to the growing enthusiasm of long-term perma-bears (hello, Jeremy Grantham), point to it.
But more than anything, the improvement in our quality of life and the size of our economy, as listed in the opening paragraph, point to this.
Stay tuned, and don't lose your courage - the human ingredient that is part and parcel of any turnaround and restoration of credit on which our economy depends.
We welcome your feedback. . . . .
Respectfully yours,
James B. Lebenthal
