Is the S&P 500 Index Fairly Priced?

Putting aside a multitude of factors impacting short-term trends, this blog focuses on 5 basic long-term market trends or correlations. For this discussion, we will look at the post-depression S&P 500 Index from June 1932 to early 2017. More specifically, we will compare expected market valuations based upon long-term trends for the following:

 Log (S&P 500 Index Price) vs. Time  S&P 500 Index Price vs. Earnings  S&P 500 Index Price vs. Dividends  Log (S&P 500 Index Price) vs. Log (Earnings)  Log (S&P 500 Index Price) vs. Log (Dividends)

First, long-term growth rate of the S&P 500 Index from June 1932 to July 2017: (Expected Value)S&P500 = 0.7239 x (1.071115)^YR-1900

By substituting the numerical value of 2017.646 for 08/24/2017, we get: (Expected Value)S&P500 = 0.7239 x (1.071115)^{2017.646-1900} (Expected Value)S&P500 = 0.7239 x 3236.67 (Expected Value)S&P500 = 2343.02 (-4.1% relative to the 08/24/2017 close)

Second, long-term linear relationship between Price and Earnings for the S&P 500 Index from June 1932 to July 2017: (Expected Value)S&P500 = 20.078 x (Earnings) - 6.12

By substituting the latest Earnings of $100.70 for July 2017, we get: (Expected Value)S&P500 = 20.078 x (100.70) - 6.12 (Expected Value)S&P500 = 2021.85 - 6.12 (Expected Value)S&P500 = 2015.73 (-17.5% relative to the 08/24/2017 close)

Third, long-term linear relationship between Price and Dividends for the S&P 500 Index from June 1932 to July 2017: (Expected Value)S&P500 = 52.279 x (Dividends) - 56.99

By substituting the latest Dividends of $47.19 for July 2017, we get: (Expected Value)S&P500 = 52.279 x (47.19) - 56.99 (Expected Value)S&P500 = 2467.05 - 56.99 (Expected Value)S&P500 = 2410.06 (-1.4% relative to the 08/24/2017 close)

Fourth, long-term relationship between Log (Price) and Log (Earnings) for the S&P 500 Index from June 1932 to July 2017: (Expected Value)S&P500 = 12.601 x (Earnings)^1.0958

By substituting the latest earnings of $100.70 for July 2017, we get: (Expected Value)S&P500 = 12.601 x (100.70)^1.0958 (Expected Value)S&P500 = 12.601 x 156.6461 (Expected Value)S&P500 = 1973.90 (-19.2% relative to the 08/24/2017 close)

Fifth, long-term relationship between Log (Price) and Log (Dividends) for the S&P 500 Index from June 1932 to July 2017: (Expected Value)S&P500 = 20.46 x (Dividends)^1.2596

By substituting the latest Dividends of $47.19 for July 2017, we get: (Expected Value)S&P500 = 20.46 x (47.19)^1.2596 (Expected Value)S&P500 = 20.46 x 128.346 (Expected Value)S&P500 = 2625.95 (+7.5% relative to the 08/24/2017 close)

By taking all 5 expected values and factoring in the respective correlations we get the following weighted average: (Expected Value)S&P500 = 2277.61 (-6.8% relative to the 08/24/2017 close)

For the supporting charts and formulas, they can be found on: http://ift.tt/2wNDO56

Submitted August 28, 2017 at 07:13PM by DTRS_Investing http://ift.tt/2xHDiSE