March 13 - As the S&P 500 Index approaches a new record high, Jeffrey Goldfarb talks to Breakingviews columnists about the U.S. stock benchmark's potential fate given the Fed model yardstick and other historical gauges.
Just -- 500 index is closing in on a new record but I may just be the start if you believe the Fed model. As it's known could smashed through that but Martin Hutchinson. Thinks that could be a crash landing not long after that why is that what we're here now society. Well basically the fat model which was accurate between the early eighties in 2007. Says that the earnings yield on the list of pretty should be the same as the M. Ten year treasury right but since ten year treasuries are down around 2% of amendment. That gives you an S&P value of 4200. Which he took quite exciting hold -- -- it for them it. I am but we all know you're -- fair ball I got the ban alcohol level was thought the Fed -- was pretty suspect but I -- thought people out there who believe it. And it does perhaps tell you that there's. Of arbitrage foresees between the ball market in the stock market let them pulling interest rates up on the boat. Stop walk and -- over the same time you put money and is of interest rates and various other things will double the normal like little long term Democrat and I like over fifty yeah separates look at -- -- fifty year is the interests. That the -- bomb grade is that -- more -- Six this right up. And so if you applied that. The SP 500 -- we love them where there's maybe even under what under a thousand or run about. -- thousand if you look at the level in the early 1990s. Which wasn't so bad market I mean the late seventies look bad market but the early nineties it was in pretty decent shape. I knew then scale laptop by what's happened to nominal GDP since then almost say the stock prices should roughly track nominal gross domestic product. Then. You come up with a value of around about a thousand or just above for the S&P. And that suggests that that's perhaps some long term equilibrium level look at dividends to come up with the same number no -- Long term earnings yields on base seats off. An average earnings as a percentage of GDP because innings of the blame Paula inflate. It's a good good point as well and is you can look at this and 500 now and you say well. Price earnings ratio right now is not out of line with the long. But that's around -- -- living room eighteen minutes in areas that looked as -- out of line with the lonesome fifty yen levels that by the same analyses and it's fairly priced now so that's okay. Actually looks at this point I think that these these made the foreigners is is looked at again food for this pieces. That the earnings that also flattered by various things that guy on the earnings as of citizens think of national income. Twelve and a half percent. At last count in the long term -- line and off the sense that they merit innings making sure that if you wanna put it that way -- -- quarter alone there are and that means. Even at those same reasonable long term price earnings graciously index itself should feel. Well obviously we can't decide what what irrational markets are gonna do but we will keep an eye on the S&P 500 of course and that record can be back with more breaking news tomorrow.