People keep asking: Are we near the bottom in the stock market?
If history is any guide, the answer is no. That's because during similarly troubled times in the past, share prices did not hit their ultimate lows until traditional valuation measures such as P/E ratios and dividend yields reached oversold extremes.
For example, while the yield of the S&P 500 index is now at a multi-year high of 3.5%, it is still one-quarter to one-half the levels seen during the Great Depression, World War II, and the stagflation of the late-1970s.
Moreover, with payouts contracting, as Bloomberg notes in the following report, "Dividends Falling Means S&P 500 Is Still Expensive," that suggests there is much more downside to come before optimism might be warranted.
The fastest reduction in U.S. dividends since 1955 is depriving investors of the only thing that gave stocks an advantage over government bonds in the last century.
U.S. equities returned 6 percent a year on average since 1900, inflation-adjusted data compiled by the London Business School and Credit Suisse Group AG show. Take away dividends and the annual gain drops to 1.7 percent, compared with 2.1 percent for long-term Treasury bonds, according to the data.
A total of 288 companies cut or suspended payouts last quarter, the most since Standard & Poor’s records began 54 years ago, when Dwight D. Eisenhower was president. While the S&P 500 is trading at the lowest price relative to earnings since 1985 and all 10 Wall Street strategists tracked by Bloomberg forecast a rally this year, predictions based on dividends show shares are overvalued by as much as 46 percent.
“It’s a greater fool theory if we always buy stocks based on earnings and we never get a penny out of it, hoping for someone to buy that stock at a higher price,” said James Swanson, chief investment strategist at MFS Investment Management in Boston, which oversees $134 billion. “Dividends have been a cushion in bad times. If they go to zero it’s a disaster.”