Saturday, November 15, 2008

Time To Buy Stocks?

Via Greg Mankiw (who in turn got it from James Hamilton)I see this chart that illustrate that stocks are no longer overvalued from a historical fundamental perspective (something which I pointed out already last month).

James Hamilton says that this implies that it is now time to buy stocks. I disagree. While we may see some form of short-term rally soon, that will likely not last. Because as the chart illustrates, during severe economic slumps like the 1930s and the late 1970s and early 1980s, stocks were much cheaper than they are now. Given the fact that I believe the current slump will be somewhere in between the 1930s and the early 1980s in severity, that means that stocks will have to fall a lot more than that before they hit bottom. Once they come closer to the lows of the early 1980s, buying might be a good idea, but not now.

Moreover, once the stock markets turn around, the U.S. stock market is not the place where you want to be. Stocks in Sweden and other European countries are much cheaper than U.S. stocks and will therefore rise a lot more once things starts to turn around.


Anonymous Anonymous said...

If we believe that booms are the cause of busts then the historical average should not be calculated using all historical prices but instead should use only an equal number of booms and busts. The average in the case of this graph has been inflated by including a huge boom which is just ending but without the following bust, it would be better to use the average price of stocks at the beginning of this boom (early 1990s) than to include the boom.

7:52 PM  
Anonymous Anonymous said...

Stock market rallys can be quite nice even if they only last for 6-12 months, wich the current one will do.

It is a pity to miss a 40% rise in a year.


10:47 AM  
Anonymous Anonymous said...

"the lows of the early 1980s"
Do you have any figures for that to share??


9:23 PM  
Blogger stefankarlsson said...

Actually, I did provide a figure in this post, namely the one you can see in the graph.

9:40 PM  
Anonymous Anonymous said...

So do you think it can be time to buy stocks related to stem cell industries and biofuel now given that they dropped bcz of the crisis?

8:24 PM  

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