Thursday, December 01, 2011

S&P 500 to GDP

This did not come out the way I think it would. My intent was to show that yesterday's jump of 400 points in the DJIA based on central banks moving money around really didn't matter, because ultimately it is production that matters. Thus the ratio of the S&P 500 to GDP.

Apparently based on this, the markets are somewhat sanely valued. Not enough to provide you guys with perpetual 12%+ a year in price increases so you can all retire magically at 62. But it's not as insanely overvalued by this measure as it is say, earnings, or more importantly, dividends.

But never mind those stupid nasty dividends. Who needs them anyway?


  1. The problem with mapping to dividends anymore is gov't policy has made them a bad deal.

    Although the early Bush tax bills made some dividends taxable at a favorable rate for the most part dividends are taxable as regular income while capital gains are taxed at lower rates that for all but the bottom two tax brackets (and half for a good deal of the stock owning population).

    It is also easier for companies to inflate stock prices without cash on hand, something they can't do for dividends. With stock options making up a good deal of compensation mangers have intensive to inflate prices as well.

    So, with tax law artificially deflating dividend and inflating prices a disconnect between the two is inevitable.

    GDP is probably the right choice, although if the whole market is x10 due to the above it'll look overvalued relative to earning. Earnings, being retained instead of spent, are closer to a dividend marker at this point.

    However, if we get rational tax law again that doesn't disadvantage dividends expect a strong correction. However, it will mean returns will be much less volatile (that famous 7% historical average relied heavily on dividends both directly and indirectly).

  2. Anonymous11:55 AM

    isn't GDP a fantasy number? Get a divorce, boost the GDP. Put the kids on ritalin, boost the GDP. Buy a house with a NINJA loan, boost the GDP. So that graph might be thought of as optimism and confidence relative to fantasy.

    I like dividends, but P/E expansion and contraction can dwarf the meager 2% the S&P 500 throws off. Does anyone expect more P/E expansion with the baby boomers retiring? Maybe the Chinese will own the entire S&P 500 when its all said and done.

  3. A much better handling of dividends would be to make dividends deductible as an expense for corporations that pay them---just like interest is---and fully taxable to those that receive them, again, just like interest is. Is there really any good reason to make debt financing more attractive than equity financing?

  4. And all these problems would go away if we just had a single numbered flat sales tax.

    Oh, wait, I'm sorry. That's too simple.

    And the Baby Boomers wouldn't allow it.

    Go back to your lives citizens. Nothing to see here.