Interpret as you wish:
I think we'll see S&P500 sub 800 again and then you can back up the truck.
I think we'll see S&P500 sub 800 again and then you can back up the truck.
why is the s&p trading higher than mid 2002
- Thread starter noob_trad3r
- Start date
You are confusing the stock market with reality. Stock markets are largely a product of creative minds, in other words liars and thieves, whereas the economy is a veiled reflection of reality. For this reason they can become, at times, quite uncorrelated, but never so much as to ruin the illusion. One can get rich investing in stocks, though it is highly unlikely, but without the illusion no one would try, and no money could be made from their efforts. It is not usually recognized, but stock markets, religion, and dog tracks all depend on illusion and delusion. The all have the potential for addiction. Oddly enough, of the three, the market is the only one that one can profit from as a participant once its nature is recognized. There are great profits to be gained from religion and dog tracks, but not by being a mere supplicant.
Nominal earnings since 2002 are only a minor driving force behind the market. That earnings are a primary driving force is an illusion created by Wall Street by the reporting of nominal rather than inflation adjusted earnings. Inflation is the primary driver since 2002. And, incidentally, inflation combined with exchange rates is now the main driver of nominal earnings for U.S.companies.
The compounding of dividends is now the crucial component that determines whether the average return, over the long haul, will beat inflation.
Up until the 1970's real earning were an important driver, but since then it has been mostly inflation.
BINGO! And 2011 has shown even greater earnings. Additionally U.S. corporations hold record amounts of cash on their balance sheets. But stock prices lead earnings and this recent rout in the market may be forecasting a slowdown in earnings,
I pointed to balance sheets, and inflation <b>is a driver of earnings.</b>
Inflation adjusted earnings are meaningless, because top line growth equates to bottom line income and additional capital to shareholder equity.
Calculating an inflation adjusted earnings is fine, <b>but it has no bearing on absolute <i>present</i> levels of capital.</b>
You can't say $5 of income 20 years ago isn't the same as $5 of income now. They are the same, and the difference is in discounting. You can't do this when it comes to discounting projected future cash flows because earnings now are in the present. What was earned in the past is on the balance sheet, and what gets earned becomes shareholder equity, so inflation cannot be adjusted down but can when using discounting mechanisms in the future. $1 now while worth more than a $1 a year from now, isn't right to say a $1 now is worth less because of inflation. Earnings are earnings, and this only matters if you're discounting projected future cash flows. This isn't the same as earnings at present. You don't discount past or present earnings. You only discount future earnings. Discounting earnings now in the present has nothing to do with earnings that were earned in the past because the top line growth driven by inflation flows to the bottom line of shareholder equity.
It isn't logical.
