Seeking Alpha

WallStreetRanter's  Instablog

WallStreetRanter
Send Message
An anonymous blogger from the 'financial industry' writing about the economy, markets, politics, corrupt organizations, or whatever else seems worth discussing.
My blog:
Wall Street Rant
  • Is This Bull Market Fundamentally Driven? (A Look At PE Expansion) 0 comments
    Mar 19, 2013 9:05 PM

    www.wallstreetrant.com

    This post over at The Big Picture Blog which had a listing of Bull markets of 20% or more without a 20% correction got me thinking about Bull Market fundamentals. Some people talk about this bull market being driven by the Fed and not fundamentals (me included). I can easily point at a Shiller PE of 23 to highlight overvaluation but I wanted to look at it another way, so I focused on PE expansion.

    Fundamentally driven bull markets should rely more on cyclically adjusted earnings growth and less on investors willingness to pay ever increasing multiples on those earnings. To look into this I decided to focus only on bull markets of 100% or more. I looked at the Starting and Ending Shiller PE using Robert Shiller's online data and updated it with daily pricing data for the important dates (as he only has monthly prices). Then I divided the Bull Market gains by the amount of PE expansion to see how much gains investors were receiving per unit of PE expansion. The results are below, sorted by most fundamentally driven to least fundamentally driven. The results are quite interesting.

    (click to enlarge)

    Take a look at the 1974-1980 Bull Market compared to today....The magnitude of the advance is similar between the two but the 1974-1980 advance only relied on a PE expansion of 2.2 vs 11.1 today. You will also notice that those that relied least on PE expansion tended to experience smaller subsequent bear markets. The top 5 averaged a bear market loss of 30.4% vs the bottom 4 which averaged a 48.5% loss. If history is any guide people should expect that the next bear market will be deeper then average because this bull market is lacking a fundamental underpinning.

    UPDATED: 3/19/2013 - Corrected chart to reflect the proper starting PE of 8.8 for the bull market starting 6/13/1949. However, this did not change the overall ranking of any of the bull markets.

Back To WallStreetRanter's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers
Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.