Outside the Box: These 3 stock market benchmarks nailed the dot-com bubble in 2000. Here’s what they’re saying now.

by | Sep 9, 2022 | Stock Market

In early July, I wrote that, from the long-run perspective of a value investor, stocks seemed cheap. The S&P 500
rose 10% during the next five weeks, before falling back to near where it was in early July. Let’s revisit the question, again from the perspective of a value investor, this time using three benchmarks I’ve described in earlier MarketWatch columns.

John Burr Williams, the original value investor, showed that the long-run return on stocks is approximately equal to the dividend yield plus the long-run growth of dividends. For example, a 2% dividend yield plus a 5% growth rate implies a 7% long-run stock return. One way to think about this is that stock returns consist of dividends plus capital gains and, if dividends grow by 5% a year, we can expect stock prices to grow by about 5% a year, too, in the long run. On March 11, 2000, I spoke at a conference on the booming stock market and the widely publicized “36K” prediction that the Dow Jones Industrial Average
would soon more than triple, from below 12,000 to 36,000. At the time, the S&P 500 dividend yield was 1.16%. Adding a 5% long-run growth rate for dividends, the John Burr Williams approach implied a 6.16% long-run return for stocks, which was below the 6.26% interest rate on 10-year U.S. Treasury bonds
Taking into account two other benchmarks I will discuss below, I concluded my presentation with the warning, “This is a bubble, and it will end badly.” In December 2008, …

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