What Drives The Stock Market

  • August 6, 2004
  • Gary Kaltbaum
I have  always been
amazed when I hear strategists telling the world the market has to
go up because the economy is strong. These strategists do not have the facts
in hand. Here are the facts:

 

Gross domestic product grew 373% from 1964 through
1981…but during that time, the market went nowhere. Yes, the DOW was flat
while the economy soared. How can that be? Let’s first look at the 1982-2000
period.

 

During the 1982-2000 period, the economy grew by
196%,  just about half of the earlier period. During this time, the DOW was up
11 fold. So, what’s wrong with this picture? It is simple.

 

The economy is not…and I know this
is blasphemy…is not the main driver of the stock market. Value
is what drives the stock market. When the
market topped out in 1964, this topping out came after an extended run,
causing historical valuations to be on the high side. When the market
ultimately lifted off in 1982, P/E multiples were under 10 and front covers
entitled “The Death of Stocks” were on newsstands. When the market topped out
in 2000, P/E multiples were at their highest levels…EVER !  The
NASDAQ  was off the charts.

 

It has been my contention that what has been going
on since the top in 2000 is a contracting of those high multiples. I have
heard market strategists, even in the last week, say that a P/E multiple of 19
for  the S&P 500 is cheap. I do not know what these people are smoking. I
believe the only way to work off the high multiples is either by earnings
catching up over time…or lower prices. I started saying it three years ago
and I will say it again. I believe we are in a period just like the years
1964-1981. I cant begin to tell you how many have castigated me for these
thoughts. These people think it is a crime to think that maybe the
stock market is not going to go up 20%/year.

 

As of this writing, DOW futures are way down on a
less-than-stellar job’s report. Major indices will now open below the
important May support. They must close below the May lows for it to be a
valid breakdown. I believe there is a chance for a washout today and a high
volume reversal to the upside. That is not a prediction…but a possibility.
After all, the market has already come way down, is oversold and I am starting
to see a few bulls turn into bears.  Either way, if you have been listening,
you have been out of the market and do not have to deal with this mess.

Gary Kaltbaum