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
SPX,
+1.53%
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
DJIA,
+1.19%
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
TMUBMUSD10Y,
3.314%.
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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