The S&P 500 hit a low of 666 on March 6, 2009 and was up 213%, excluding dividends, through November 4, 2016. Since then, the S&P 500 is up another 4.6%, and closed just 0.5% from a new all-time high last Friday.
Get ready for more. We expect the S&P 500 to hit an all-time high soon as the bull market in US equities continues, and we expect equity values to boom in the years ahead.
This is hard for some to believe, especially those who think the bull market that started back in 2009 is a "sugar high." After all, the Federal Reserve has ended Quantitative Easing, lifted rates once last December and, according to futures markets, has 100% odds of lifting rates again in a few weeks.
But Quantitative Easing and zero percent interest rates were never the reason stocks rose. It's true that low interest rates can push stock prices higher. Future earnings are worth more today when discounted with a lower interest rate than they are with a higher interest rate. Lower interest rates can justify higher price-to-earnings ratios.
But, since 2009, our capitalized profits model, which uses economy-wide corporate profits and the 10-year Treasury yield to value stocks, consistently said US equities were undervalued. This was even true when we used a higher discount rate. These days we use a 3.5% 10-year Treasury yield (higher than the current 2.3%) and the model still says stocks are undervalued by almost 25%.
But that's just the beginning. Even though the Federal Reserve is on the verge of lifting interest rates, monetary policy is about to get much more accommodative.
Quantitative Easing never had much impact on the economy because with one hand government was shoveling money into the economy, but with the other hand was hammering banks with regulations, higher capital requirements, and fines. The result was that, in spite of QE, the growth rate of the M2 measure of money never accelerated. This is why inflation never accelerated and we can say QE was not the reason stocks rose.