By Charles Biderman
Much more money has been made owning stocks than the public companies’ earned. That’s the reason the market inevitably has to fall once the Bernanke Put stops working.
Let me explain. The S&P 500 currently has a market capitalization of $13 trillion. That means if you add up all the shares in each company and multiply the number of shares by today’s stock price and then add all 500 valuations together and you get a $13 trillion value. Compare today’s $13 trillion, which by the way is just 4% below the 2007 all time high, with a $1 trillion market for the S&P 500 companies 30 years ago at the end of 1982. Yes, the actual S&P 500 itself is still 8% below the all-time high, but the market value gap is less because of a 4% increase in shares, AKA float growth.
What this means is that if the S&P 500 compares are worth $13 trilliontoday and were worth just $1 trillion at the end 1982 that means shareholders have a currently existing $12 trillion profit. That $12 trillion profit is 20% higher than all of the $9.5 trillion in profits made by each of the S&P 500 companies over the past 30 years combined.
While the S&P 500 is only 70% of the entire market, we know it is a good indicator because of S&P Indices data guru, our good buddy, Howard Silverblatt. And that is why we are using the S&P 500 to illustrate the development of the cult of equities.
This next bit might be tricky for some of you to understand. Over the past 30 years companies have made $9.5 trillion in profits and that most of that money has been spent. Yes some on capital equipment, some on dividends. But compare that mostly spent $9.5 trillion with the $12 trillion gain from higher stock prices on the shares of those 500 companies.
This huge gain, actually about $17 trillion for the entire U.S. stock market has created the cult of equities. The cult believes that stocks will outperform over time. It has for the last 30 years right? So the cult believes that will continue forever. Wrong.
At the end of 1982 there were just 800 or so mutual funds and maybe a few hundred hedge funds combined managing less than $500 million in aggregate. As a result of a 12 times gain in stock values, there are now over 4,000 equity mutual funds and at least 10,000 hedge funds and large sized family offices.
So what I am saying is that the appreciation in the stock price of just 500 companies has made thousands of money managers and their clients extremely wealthy. Much more wealth created from just owning stock than in salaries for running those companies.
As I have said several times before what is different between 1983 and 2007 was that after-tax income, which includes capital gains, grew by more than 5% on average. As a result of that very rapid growth, the Price Earnings ratio of stocks soared to 20 to 1 during the 1983 to 2007 bulll run. That compares with an average PE of 8 from 1966 through to 1982. Why was the average PE just 8 between 1966 an 1982? Simple after tax income net of inflation grew by less than 3% on average over those 17 years. Guess what, since 2010 after-tax income net of inflation has been growing by under 3%. The stock market will be a totally different place at an 8 PE than today’s 15.
All that is holding the stock market up at this point is the Bernanke Put. At some point, after the Black Swan takes out the Bernanke Put the cult of equity will die. Which could ultimately be great for the economy.
The best and the brightest will stop flocking to Wall Street and maybe stay home and create new and better ways by starting, running and growing businesses. And not just by owning stocks.