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Article Review on Stock Market

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Article Review

Summary

The article is about the stock market valuation and its main purpose was to highlight how the stock market prices have increased tremendously for the past few years. According to the article, only three times the stocks have been more expensive than they are currently over the last century. These periods, according to data obtained from Robert Shiller, include 1920s, late 1990s, and just before the 2007 financial crisis. The current economy seems to favor stock prices as interest rates are exceedingly low and inequality is still increasing.

According to the article, it likely for the interests rate to remain low and inequality to continue rising for a long period. If this holds, people should not worry about the stock market valuation. In other words, the stock market prices will remain on permanently high plateau. However, the article has also noted that these arguments could be wrong as it happened in 1920s, 1999 and 2007. In these three periods, similar arguments about the stock prices remaining high forever were all wrong. According to Shiller and John Campbell, well-known economists, people should be skeptical of the arguments that are stating that this time is different.

One notable point raised in the article is that the stock prices are currently high, but it is not possible to tell whether they remain this ways or not.  The only assumption that can be made is that the stock returns might fall in the near future. The historical comparison provided in the article is rarely used for the stock market’s valuation as the most regularly used measure is the price-earnings ratio. The price-earnings ratio tend not to provide the true picture of market’s valuation as it is only based on 12 months which is a very short period of time to predict anything. As a result, Mr. Shiller has come up with his own version of 10-year price-earnings ratio, where he argues that if this ratio reaches 25 (its current state), “disappointment tends to follow (Leonhardt A3).” According to Schiller, when the price-earnings ratio is equal to 25 or more, the stock prices fall by around 12%. However, this does not mean the current stock prices will fall by 12% or more as there is no method to predict the future, notes Mr. Schiller (Leonhardt A3). Mr. Campbell has also provided some reasons why he thinks stocks prices are currently higher than in the 20th century. The reasons he provided include: the stock ownership is spread to a larger group of investors, which means the risk is distributed more broadly; and there is no recent world wars (Leonhardt A3).

What I have Learnt

The article has highlight important details about stock market valuation and the 3 main points I learnt from the article are as follows: first, I have learnt that only three times the stocks have been more expensive than they are currently over the last century. This was in 1920s, late 1990s, and in 2007. Second, the increasing stock prices are favored by the current state of economy whereby the interest rates are very low and inequality is still increasing. Finally, it is unlikely to predict the performance of the stock market in the coming years as there is currently no stock market valuation method that can manage to do so.

Work Cited

Leonhardt, David. "Maybe it's time to worry about stock market bubbles." The New York Times 6 May 2014: A3. Print.

 

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