When stock market guru Laszio Birinyi told bubblevision today that S&P 3200 would be reached by 2017, he's argument was essentially to keep on keeping on:
“What we're really trying to tell people is stay with it, don't let the bad news shake you out…There's no reason we can't keep on going,” he said.
That got me to thinking about when I first ran into Birinyi at Salomon Brothers way back in 1986. He was then a relatively underpaid numbers cruncher in the equity research department who was adept at making the bull case. Nigh onto 30 years later he has become a rich man crunching the numbers and still making the bull case.
Indeed, I don't ever recall when he wasn't making the case to be long equities, and as the chart below shows, you didn't actually have to crunch the numbers to get there. Just riding the bull from 200 in January 1986 to today's approximate 2100 on the S&P 500 index computes to a 8.4% CAGR and a 10% annual gain with dividends.
^SPX data by YCharts
Even when you take the inflation out of it, the 30-year run is something close to awesome. But, alas, that's my point. It's too awesome.
In inflation-adjusted terms, the S&P 500 index rose by 6.2% per annum over the last three decades. That compares to just a 2.2% annual advance for real GDP, meaning that the market has risen nearly 3X faster than national output in real terms.
You don't have to be a math genius to realize that a few more decades of that kind of huge annual spread, and the stock market capitalization would be several hundred times larger than GDP.
Likewise, you don't have to be a PhD in quantitative historical research to recognize that the last three decades are utterly unique. If you run the clock backwards by 30 years from the January 1986 starting point, for instance, you get a totally different picture.
Between the relative sunny Eisenhower times of 1956 through the eve of Greenspan's ascension to the Fed, the S&P index rose by only 4.4X, not 10X. Even more significantly, when you strip out the inflation, the real index rose by 1% per year, not 6.2%.
Moreover, those dramatically less awesome stock market trends occurred during an era when the US economy was riding at its post-war high and clocked GDP growth of 3.5% per annum. That's 60% more than the most recent equivalent period.
