Booms, bubbles, and busts in US stock markets by David Western

By David Western

In the U.S. inventory industry issues have replaced greatly because the heady days of the Nineteen Eighties and we're now getting into an period of profound uncertainty, with so much analysts predicting hassle forward. certainly, the alarming decline of the NASDAQ indicates no signal of abating and the terror is that conventional industries may be the subsequent to chew the dirt. September eleventh has basically additional to the gloomy mood.

A simple review of the internal workings of the USA inventory market, this ebook examines the present marketplace stipulations ahead of in retrospect to the occasions of the prior century - the nice melancholy, the Nineteen Seventies oil difficulty, the party-for-the-rich surroundings of the Eighties and the emergence of the hot economic climate.

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Extra resources for Booms, bubbles, and busts in US stock markets

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In fact, P/E ratios were in their low thirties during some months and even higher for the Dow and NASDAQ. 5) only to collapse in 2002 (19–1). Earnings from stocks (E%—column 7) remained below the risk free rate on the 10 year bond (Y%—column 8) for most of these years—revealing investor optimism concerning capital gains. 1 illustrates that. 5 per cent (column 5). Stocks could not and did not justify themselves with this meager rise in the EPS growth. Stock prices had to fall and they did. The market collapsed by an average of—15.

This switch was partly by choice and partly by the unexpected collapse in stock values. 7 Contribution to household wealth: housing and corporate equity claims. Source: Kopczuk and Saez (2004). Warning signals: why not switch? There were several warning lights flashing in the 1990s that stocks were indeed overvalued. So why did the majority of investors not switch out of stocks and into bonds, money market mutual funds, gold, real estate or other hard assets? This question has already been partially answered—that stockbrokers pushed the line that investing in stocks was a ‘one-way street’—and pointed to Siegal’s research that stocks persistently beat bonds.

However, this superior performance is based on capital gains as well as dividends. 1, the trend line Dow performance (the dark line) has always rested above the nominal interest rate on the one-year treasury bill (T-Bill)— except for a brief period in 1981. Hence, a ‘buy and hold investor’ could effectively borrow funds and hold the Dow portfolio knowing that capital gains would be greater than the one-year T-Bill rate. Moreover, dividend payouts would accrue to such a conservative investor making the overall returns even greater.

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