Tabell’s Market Letter – July 28, 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 1609) 987-2300 July 28, 1989 This week's action produced yet another burst of market strength, taking most major averages to – -new-bull-market highs.and-producing ,- inthe-process ,-an- alltime-closing–highfor the ,B&,.p500 The burden of this letter's argument over the past month has been that, from a technical' point of view, there is nothing historically unusual about the current market rally. Both in terms of percentage advance and of lapsed time, the marks for the pl'esent upswing have typically been exceeded in prior cycle bull markets, suggesting that there remains. currently, further room on the upside. The same suggestion is supported by basic fundamental valuation statistics. This point has, of course, been made elsewhere, but we think it is worthwhile to cite a few numbers and offer some notes on methodology. We will be using the S & P 500 as an example. Earnings and dividends for the twelve months ended June 30 on the 500 are not yet available, but reasonable estimates, based on three quarters of actual figures are 25.90 of earnings and 10.38 of dividends. At last night's close of 341.99, the 500, therefore, was selling at 13.2 times earmngs to yield 3.04. Note that this statement is based on trailing figures and, except for a single quarter, no estimates are involved. Date of High 5&P 5ubseq.Percent PIE 5&P Percent Yield S&p Percent 500 Low Decllne at Hlgh Equiv Dlff. at High Equiv Diff. Jan 5 53 26.66 22.71 -14.8 11.3 314 -7.6 5.29 212 -37.8 Aug 2 56 49.74 38.98 -21.6 13.9 386 13.6 3.44 325 -4.3 Dec 12 61 72.64 52.32 -28.0 23.8 661 94.5 2.70 414 21.9 Feb 9 66 94.06 73.20 -22.2 19.7 547 61.0 2.83 395 16.3 Nov 28 68 108.37 69.29 -36.1 19.1 531 56.1 2.80 400 17.5 Jan 11 73 120.24 62.28 -48.2 19.4 539 58.6 2.59 432 27.1 5ep 21 76 107.83 86.90 -19.4 13.0 361 6.3 3.49 321 -5.7 Nov 28 80 140.52 102.42 -27.1 9.6 267 -21.5 4.32 259 -23.8 I-I—l\-.'.U9S….s'1-3-3…7-7–2U-92-33-.s23….4—…6….S 0……….9.1-.3-0–;2 53 -4.42-.-.3.Q—–1-f In the table above. We present several figures for the last nine major bull-market highs in the S & P 500. The first four columns show the date of the high, the average at that high, the subsequent low and the percentage decline. The key figures are the price learnings ratio and the yield which existed at each of these market highs. Both of these statistics, to make them comparable with those cited above, are computed using trailing earnings and dividends—those for the quarter ended prior to the high. To the right of the columns for P IE and yield, we show the S & P equivalent. This figure represents a possible value for the first quarter of 1990, using S & P's estimates of 27.79 for 500-stock earnings in 1989 and the index's indicated annual dividend of 11.19. The equivalents show where the S & P would sell were these historical PIE ratios and yields to be duplicated. To the right of the equivalent is shown the percentage change to that price from the current one. The clear implication is that, based on earnings at least, the S III P composite is conservatively valued vis-a-vis past bull-market highs. Only two bull markets, 1953 and 1980, have ended with the 500 at a lower PIE. Were the average, before this advance is over, to trade at 19-23 times earnings, a level which characterized 1961-1973 market highs and was again reached in 1987, it could sell some 60-90 above today's price. When one looks at yield, the historical comparisons are till positive, albeit a little less optimistic. The so-called yield ceiling has been an effective cap for most bull markets. generally cutting off rises when dividend return for the S & P 500 has dropped significantly under 3. As the final column of the table shows, there is room for a modest further advance in price based on current dividend rates, but astronomically higher prices appear unlikely. DiVidends could, of course. rise well beyond 1989's indicated annual rate. Indeed, given the sharp rise in earnings since 1982, the current payout ratio, around 40. is at historically low levels, indeed the lowest it has been in sixty years with the exception of 8 brief period In 1979. There thus appears room for continued improvement in dividends despite a possible slowdown in earnings growth. In any case, just as technical comparisons do not suggest that the advance to date has been excessive. valuation analysIs indicates that. at present levels. the S &; P 500 remains relatively inexpensive. ANTHONY W. TABELL DELAFIELD, HARVEY, TABELL INC. Dow Jones Industrials (12 00) 2644.34 S & P 500 (1200) 341.85 Cumulative Index (7/27/89) 4773.78 AWTebh No statement Or expression of opInion or anyother malter herein contained IS, or IS to be deemed to be, directly or Indlreclly, an offer Of the solicrta1lOn of an offer to buy or sell any secUrity referred to or menlloned The matter 15 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 Ihe statements made herein Any action to be taken by the subSCriber should be based on hiS own Investigation and mformatlon Delal!eld, Harvey, Tabelllnc, as a corporalion and rts officers or employees, may now have, or may later take, poSitions or trades In respect to any secuntles mentioned In thiS or any future ISsue, and such POSfllOTl may be different from any views now or hereafter ex-pressed In thiS or any other Issue Delafield, Harvey, Tabell Inc, which IS regIstered with the SEC as an Inveslmen! adVisor, may give adVice to Its Investment adVISOry and other customers Independently of any statements made In thiS or In any other Issue Further information on any secunly mentioned herein IS available on request