What the 1929 crash tells us about stocks today
Standard and Poors: All indices
Chinese property bubble under scrutiny
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Investment Outlook By Bill Gross, March 2010
Shanghai, China
An article in the latest edition of IMF’s Finance & Development magazine offers a historical perspective on housing prices and explores the causes of boom-and-bust cycles in the housing market.
From the article titled Housing Prices: More Room to Fall?:
“IN 1625, Pieter Fransz built a house in Amsterdam’s new Herengracht neighborhood.
As the Dutch Republic rose to global power in the 1620s—with Amsterdam developing the world’s first major stock market as well as commodities and futures markets—the price of the house doubled in less than a decade. Over the succeeding three centuries, the price of Fransz’s house was knocked down by wars, recessions, and financial crises and rose again in their aftermaths (Shorto, 2006). When the house changed hands in the 1980s, its real value, that is after inflation, had only doubled over the course of 350 years––offering a very modest rate of return on the investment.Indeed, viewed over the long course of history, the distinctive feature of house prices in Herengracht has been not the trend but the cycles (see Chart 1): innovations and good times raised the price for years at a time and—seemingly just when the conviction had taken root that this time would be different—shocks came along to knock prices back down.Starting in the late 1990s, prices of houses in Herengracht, and more generally in Amsterdam, doubled in value in 10 years, only to begin another sharp decline. This recent run-up and correction in prices in Amsterdam was part of a global boom and bust in house prices. House prices soared in the United States, fueled by innovations in housing finance. They also rose in Ireland, coinciding with a historic growth surge; in Spain and Australia, buoyed by immigration; and in Iceland as part of a boom induced by a tremendous expansion in the country’s financial sector. In 2006, house prices started to fall, first in the United States nd then elsewhere (see Chart 2).”
Can house prices fall further?
According to the author Prakash Loungani, house prices in many countries have more room to fall.
The author offers the following three points to support his conclusion:
The S&P 500 is up 5.05% YTD. But the financial sector component in the index has increased by 10.3%. Many of the beaten down banks have recovered nicely in the past year and continue to gain further traction.
Some of the community bank stocks currently offer high dividends. The following is a list of 33 banks trading in the NASDAQ markets that have over 5% dividend yields:
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Last week Jason Zweig discussed about the popping of the tech bubble ten years ago in the article When Bubble Burst: Companies Won, Investors Lost.
From the article:
“The Internet did change business forever, just as investors had predicted. And a handful of technology companies did strike it rich. But by far the biggest beneficiaries of the Internet boom were the companies that adopted the new technology rather than those that provided it. When I asked Aronson+Johnson+Ortiz LP, a Philadelphia money manager, for a list of the 100 top-performing stocks over the past decade, the roster was dominated by energy, health-care, materials, industrial and even financial companies. Only eight tech stocks made the list.
That’s mainly because their share prices got so inflated in the first place. As businesses, tech companies did very well. Technology was the most profitable sector in the Standard & Poor’s 500-stock index in 2009, contributing $93 billion of earnings, estimates Strategas Research Partners. Since the beginning of 2000, tech companies have generated $608 billion in cumulative profits. They have piled up $349 billion in cash, or 35% of the total at nonfinancial corporations. And over the past 10 years, Amazon has doubled even as the S&P 500 went nowhere.”
Some of the tech giants from the 90s such as Apple, Microsoft ,Intel, Cisco, etc. continue to be among the largest companies on the NASDAQ market.
The Top 25 Companies ranked by Market Capitalization are listed below:
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The current yield on the S&P 500 is just over 2%. Last year the yield was 2%. Many foreign markets offer higher dividend yields than the U.S. This is especially true with most developed countries.
In 1979, the S&P 500 had a 5.53% yield. But since 1990, it has steadily decreased and reached a low of 1.89% in 2007. In 2008, the yield rose to 3.11%. The current yield of just over 2% is very low. This is because many U.S. companies believe in reinvestment or retained capital as opposed to paying out a higher portion of profits to investors as dividends. In November last year, the Journal reported that the 500 largest non-financial companies by assets in the U.S. had stashed about $994 billion in cash and short-term investments.
The chart below shows the current dividend among G-7 countries:
Source: Pensions & Investments
Except Japan, all other countries have higher yields than the US. European companies traditionally have had higher payout ratios and continue to follow that policy.
The following 13 Foreign Stocks have Dividend Yields of Over 5%:
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