wilson@convex.UUCP (02/18/86)
The current high market indices have been attributed to the poor market witnessed over the last ten or so years in the sense that many of the major stocks have been grossly undervalued for quite some time in terms of their book values and earnings potentials. The stock prices which seem so high to some are deemed reasonable by others who say that such a climb was inevitable.
ins_aam@jhunix.UUCP (Abhijit Mazumder) (02/21/86)
> > The current high market indices have been attributed to the poor market > witnessed over the last ten or so years in the sense that many of the > major stocks have been grossly undervalued for quite some time in terms > of their book values and earnings potentials. The stock prices which seem > so high to some are deemed reasonable by others who say that such a climb > was inevitable. The stock market is simply a giant present value machine (to quote a few professors). A stock represents a potential income stream (the dividends it pays). The price of the stock is the value today of that future income stream. It is related to interests in the following way: PV= X X X ---- + ------------ + ------------------ + ....... (1+r1) (1+r1)(1+r2) (1+r1)(1+r2)(1+r3) where X is the dividend and rn is the interest rate in year n. As the interest rate goes down, the present value goes up, and the price goes up. Also as the expected dividends rise, the present value goes up. Recently, both of these things have been happening. Interest rates have been falling (as is evidenced by new car commercials offering even lower finance rates) and expected yields have been rising (due to the recent boom in the economy). These are the fundamental reasons for the recent rise in the stock market. See, there reason behind this madness. Paul ------------------------------------------------------------------------------ Paul Markowitz "A pessimist is someone who won't call on G-d because he is certain he will get an answering machine" -- my sister "Another tea time, ..!seismo!umcp-cs!jhunix!ins_aprm another day older" bitnet: ins_aprm@jhuvms -- Jethro Tull arpanet: ins_aprm%jhunix.bitnet@wiscvm.arpa
dsf@allegra.UUCP (David Fox) (02/27/86)
Another reason the stock market is doing so well is that the tax free bond market is so poor. The administration's promise to "close up tax loopholes for wealthy investors" has caused new tax free bond issues to nearly cease to exist, since no lawyer will say for sure that they will continue to be any good. People with cash lying around that they would usually invest in tax free bonds have to put it somewhere, and many are putting it into stocks. This increases demand and drives up prices. Presumably, when something breaks in the bond situation the stock market may even out, at least a little. This is basically conjectural, but I've corroberated it with my broker.