Tabell’s Market Letter – February 10, 1989

.-;,- TABELL'S MARKET LETTER 600 ALEXANDER ROAD, CN 5209, PRINCETON, NEW JERSEY 08543-5209 MEMBER NEW YORK STOCK EXCHANGE, INC MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC (609) 987-2300 February 10, 1989 in Equity maret actin since the crasE!f October. 1987 has had. from a technical point of view. some strangets 77nd- they flaveoeen–notea thisspacelt- is– arguable -urat 7 oas-eCi on–Iundamental;;s…..– also, the market pattern has been somewhat unusual. This is apparent whether one takes a longer-term or shorter-term VIew. Date S & P 500 Earnings PIE Dividend Yield May 29–;1946 19.25 .90 21.4 .68 3.53 Oct 9, 1946 14,12 .89 15.9 .69 4.89 Jun 15, 1948 17.06 1.71 10.0 .85 4,98 Jun 13, 1949 13.55 2.38 5,7 .98 7.23 Jan 5, 1953 26.66 2.40 11.1 1.41 5.29 Sept 14, 1953 22.71 2.51 9.0 1.42 6.25 Aug 2, 1956 49.74 3.60 13.8 1.80 3.62 Oct 22, 1957 38.98 3.47 1l.2 1.76 4.52 Dec 12, 1961 72.64 3,05 23.8 1.96 2.70 Jun 26, 1962 52.32 3.37 15.5 2.04 3.90 Feb 9, 1966 94.06 5,19 18.1 2.72 2,89 Oct 7, 1966 73.20 5.51 1.3 2.89 3.95 Nov 29, 1968 108,37 5.66 19.1 3.03 2.80 May 26, 1970 69.29 5.63 12.3 3.17 4.58 Jan 11, 1973 120,24 6.42 18.8 3.15 2.62 Oct 3, 1974 62.28 9.11 6.8 3.59 5.76 Sept 21, 1976 107.83 9.25 11,7 3.76 3.49 Mar 6, 1978 86.90 10.89 8.0 4.66 5.36 Nov 28, 1980 140.52 14.64 9.6 6.07 4.32 Aug 12, 1982 102.42 14.17 7,2 6.81 6,65 Aug 25, 1987 336.77 14.42 23.4 8.52 2.53 Dec 4, 1987 – – – – – Feb-7988- 223.92 29903 15.86 24.25 14.1 124 8.66 9746 3.87 3;16——-I Some of the longer term aspects are highlighted in the above table. covering 40-plus years of market action. Using the S & P 500, it shows each major bull market high and low together with earnings and dividends for the latest reported trailing 12 months. These figures are used to derive pricelearnings ratios and yields. A rather obvious progression is apparent. Starting on June. 1949. with a pIe ratio of under 6 and a yield of over 7. each successive bull market peak—and likewise each subsequent bear-market low—tended to produce a higher pIe for the 500 and a lower yield. By the 1961 high, the result of this process was a pIe of well over 20 and a yield of under 3. The next decade-and-a-half was a reversal of that process. Each bear market showed a lower pIe and a higher yield. and. finally, the market bottoms of 1974. 1978. and 1982 produced figures not all that different from those of 1949. After 1982. the process that had tRken 12 years to complete in 1949-61 was repeated in five years between 1982 and 1987 with an almost astronomical jump in common stock evaluations. At pre-crash highs, the pIe ratio found itself again at 1961 levels, and the S &; P 500 yield was the lowest in its modern hIstory. The crash. as has been widely pointed out. removed much of the overvaluation. At the post-crash low. the S &; P was sellIng for a relatively modest 14.1 times earnings and yielded 3.87 percent. Action since that time has been particularly interesting smce, While stock prices have risen, they have not increased as much as earnings. and the multiple at Tuesday's high, 12.4 times estimated 1988 results. is lower than the figure at the crash low despite an mtervening 34 advance. This sort of action is fairly unusual since earmngs mUltiples during bull markets tend to expand, accelerating the effect of rising earnings. Once more, the 1946-1949 period provides the only recent instance of similar action. At that time. earnings generally improved (up 167 from the end of 1946 through mid-1949). but the price trend remained flat. Today a 68 earmngs jump has produced a price rise of only half that much. It is difficult to tell what all of this portends for the future. If one wishes to make a , super-bullish case, it is certainly arguable that mUltiples could expand further. An eighteen multiple coupled with a 10 earnings increase could produce an S &; P of 480 (equivalent to Dow 3760). On the other hand. the yield ceiling. at around the 2.8 percent level. is an oft-noted phenomenon and one that has consistently turned back bull markets since the early 1960's. Based on current dividends. the S &; P would start bumping up against this ceiling at only a bIt more than 10 above its present level. Since this IS a technical letter, no attempt has been made to forecast what earnings or diVIdends might be for 1989 and beyond, and indeed, barring a major recession, such a forecast may even be relatively unimportant. As the table suggests, the difficult question of where the market will be willing to value earnings and dividends may be the crucial one for 1989. ANTHONY W. TABELL DELAFIELD, HARVEY, TABELL INC, Dow Jones Industrials (12 00) 2307.50 S p 500 (1200) 295.31 Cumulative Index (2/9/89) 4230.31 No statement Or expreSSion of opinion or any other matter herem contained IS, or IS to be deemed to be, directly or Indlrectty. an offer orthe sohcltatlon of an offer to buy or sen any secUrfty referred to or mentioned The matter IS presented merely for the convenience of the subSCriber While we believe the sources of our InformatIOn to be reliable, we In no way represent or guarantee the accuracy thereof nor of the statements made herem Any acllon to betaken by the subSCriber should be based on hiS own Investigation and mformaMn Delafield. Harvey, Tabellinc. as a corporation and Its officers or employees, may now have, or may later take, positrons or trades In respect to any seCUrities mentioned In thIS or any future ISSue, and such posrtlOn may be different from any views now or hereafter expressed In thiS or any other Issue Delafield, Harvey, Tabellinc , which IS registered With the SEC as an Investment adVisor, may give adVice to lis Investment adVISOry and other customers mdependently of any statements made m thiS or In any other Issue Further Information on any secunty mentioned herem IS available on request