January 24, 2008 | posted by Michael Baxter in UK economy, US economy |

There’s a famous saying: “The stock market has predicted 10 out of the last 3 recessions.” Put it another way. The last few years have been a period of dramatic economic growth. The global economy has soared, the US has grown at a rate which is well above the historical average, and the UK’s longest-ever run of uninterrupted economic growth seems set to continue. And yet actually, for stock markets in the US and UK it has been a very poor period. Right now, the FTSE 100, which, by the way, is to a large extent made up of multinational companies with strong links into the economies of rapid growth, is more than 1,000 points below its all-time high set on the last day of the last millennium.

Even the Dow is now only 500 points above the former all-time high set on December 14 2000, before the previous stock market crash.

And here is another odd thing. Shares in many parts of the world remain cheap. Take as an example, the FTSE 100. Right now, the total capitalization of the index, relative to projected future earnings – or the p/e ratio, is around 11.5. This compares with an average last year of 12.5, a five-year average of 14.7, a ten-year average of 18, and a 30-year average of 14.1.

For a fascinating look at p/e ratios across the globe, click here.

So that’s all a little odd. The economy boomed for most of this decade, and yet, or so it appears, shares underperformed – at least they did in comparison to previous periods.

So if we want to take a punt on what the economic prospects are for the next few years, it might be best to completely ignore the markets.
Maybe, instead, we should put our faith in politicians. Speaking at Davos, US Secretary of State Condoleezza Rice said “The US economy is resilient, its structure sound, and its long-term economic fundamentals are healthy.

”The US continues to work on foreign investment and free trade, and our economy will remain a leading engine of global economic growth. So we should have confidence in the underlying strength of the global economy and act with confidence on the basis of the principles that lead to success in today’s world.”
So that’s all right then, if Ms Rice said things are all well and dandy, they must be.

Well, maybe before we make a decision, we should look a little deeper.