So why are stocks booming at a time when the economic system has deteriorated and the ranks of the unemployed have swelled?
One rationalization typically given for the S&P 500’s
38% bounce off the March lows is that rates of interest are decrease.
Doug Ramsey, chief funding officer of Minneapolis-based The Leuthold Group, isn’t shopping for it. In any case, if rates of interest fall on the identical time, and charge, that progress charges do, then the honest value must be the identical.
He makes an attempt to point out this distinction in two charts.
First he plotted price-to-earnings ratios versus the yield on 10-year authorities bonds. If rates of interest have been the motive force of positive aspects, then markets with detrimental rates of interest like Austria and Germany ought to have even higher valuations.
However Ramsey finds, they don’t. He finds principally no correlation between rates of interest and price-to-earnings ratio.
What does work? He says the common age of a rustic’s residents has an affordable correlation to its stock market valuation. “A lower average age is essentially a proxy for a higher fertility rate, more liberal immigration standards — or both — which supports a higher sustainable economic growth rate and, in turn, a higher normalized P/E multiple,” he finds.
New Zealand and the U.S. truly outperform the regression by a ways. However most of the European markets, and Japan, match almost on or close to the road.