James D. Hamilton notes that while the economic picture is going to get worse, stocks typically find lows three to six months before the end of a recession. He sees reasons for hope. 
Some encouraging developments
Courtesy of James D. Hamilton, Econbrowser.
Plenty of gloom out there if you’re hungry for more. But I wanted to pass along a couple of developments this week that give me some hope.
First, via Rebecca Wilder and Arnold Kling, the Federal Reserve’s H8 statistical release shows a big increase in real estate loans held by large commercial banks during the last week of September. There’s likely a mechanical explanation in terms of some reallocation of security ownership during the recent turmoil. But if there has also been an increase of direct lending, that would be a promising development.
|
|
Whatever the meaning of those numbers, let me separately suggest that the recent dramatic drop in stock prices means that equities are more reasonably priced today than they have been at any time in the last decade. I am speaking from the perspective that the true value of a stock is the claim it represents on the discounted present value of future earnings. Stock prices have fallen much more than a reasonable projection of long-run earning potential, with many stocks offering a dividend yield today that is not far from the coupon yield on bonds. Once we get past the current economic challenges– and we will– those dividends are going to grow with inflation and real GDP, whereas coupons remain stagnant.
Capital Chronicle notes that Yale Professor Robert Shiller tries to capture the long-run value of stocks by taking the ratio of the current stock price to a ten-year average of recent earnings. On the basis of that long-run price-earnings ratio for the S&P500, you’d say that stocks today are a better buy than they’ve been at any time since 1995.
|
|
Granted, the economic picture is going to get worse— perhaps much worse– before it gets better. But the best time to buy stocks is 3 to 6 months before the recession is over. The last two recessions each lasted for 8 months. The current recession I believe began in December, which makes it 11 months old already. The longest postwar recessions on record lasted 16 months. This one could well go longer than that, but even if it does, this might not be a bad time to start buying.
Just sayin’.
