As of lately I have got numerous questions from friends, colleagues and students as to whether I think the stock market rally is getting close to an end. The arguments are always the same: S&P is at its all-time-high, stocks all over the world have been lifted by ultra-low monetary policy, company earnings are declining and geo-political concerns abound. In addition, many commentators and “experts” in the media, not only the perma-bear journalists of mainstream business news but also various seasoned investors, claim to be concerned.
I would like to make one small contribution to this discussion. Particularly since I am sometimes, mistakenly, taken to be a local Dr Doom. It can be summarized in one short sentence: measured in the only hard currency there is, gold, S&P500 is neither cheap nor expensive at this point! Look at the two attached graphs. The first graph shows gold and S&P500 from 1968 until today, measured in US dollars. And the second graph shows S&P500 measured in gold instead of US dollars. There are two points that I want to make:
1) Seen over the (really) long term the cost of buying gold and the cost of buying shares of US companies has increased with roughly similar amounts.
2) According to price history, the price of a piece of corporate US is not cheap when counted in number of gold bars. However, it is not excessively expensive either!
Of course, there are many issues with this simplistic analysis. While S&P500 has changed since 1968, a gold bar is still a gold bar, at least from the mid-70s onwards when the US legalized gold possession. Also, gold prices fluctuate a lot and some of this could of course be due to market overreactions.
Predictions are always difficult, particularly of the future! On one hand, the last time S&P500 cost 1.5 Oz of gold was in September 2008.... :( On the other hand, the second last time S&P500 cost 1.5 Oz of gold was in 1995... :)