The Market Basket by Eric Hanson

Hanson Investment Management

Then and now: prices and the economy

The nice thing about 20 years is it is a long period, and over long periods you lose the peaks and valleys of annual results and are left with smoother trend lines. This is how it's been with the stock market and the economy since Business People, nee Business Digest, was born in 1984.

Over the last 20 years, corporate profits have grown 6.5 percent per year, right in line with the post-World War II average. This may surprise you. The roller coaster of events since 1984 includes the October 1987 stock market crash, two Gulf Wars and, of course, 9/11. Still, the economy has grown and corporate profits have marched right along.

It has been said the four most dangerous words are, "This time is different." Usually "this time" does not end up being that different when you focus on the long-term average. The economy takes the events of the moment, makes the necessary adjustments and moves on to new higher ground.

This is fortunate, because as the economy goes, so goes the stock market. Historically the Dow Jones Industrial Average has moved up right in line with corporate profits. Over long-term periods, when profits increase, so do stock prices, and in the last 20 years, the market has done even better than this. The total return of the Dow Jones, which includes price appreciation and dividend income, has been 13.7 percent per year since 1984. Why the big move? First, corporate profits did well; and second, investors were willing to pay a higher price for a dollar's worth of earnings. The price-to-earnings ratio went from 11x in 1984 to 19x today.

This is both good news and bad. The good news is, anyone invested in stocks over the entire period made a lot of money. The bad news is it is unlikely that price-to-earnings ratios will double again the next 20 years. Many pundits, including Warren Buffet, think stocks will do well to return 6 percent a year the next five to 10 years as Wall Street settles back to more normal PEs.

On a more local economic note, I have been tracking Chittenden County prices since 1986 to see how some important (and not-so-important) prices have done versus the national CPI numbers. My results are far from scientific but are interesting nonetheless.

Cable TV service, for instance (now $47 a month), has increased 348 percent since 1986; a round-trip airfare from Burlington to Boston (now $366) is up 205 percent; and babysitting (now $30 for four hours) has zoomed 329 percent. The overall Consumer Price Index has increased only 71 percent since 1986.

There were some bargains, also. You can dock your 30-foot sailboat at Shelburne Shipyard for the season for $2,160. This is only a 50 percent increase from 1986; and an espresso at Leunig's at $2.05 is up only 37 percent in two decades.

The most economically important price on my list is a gallon of gas. Gas prices have all of us in shock now but gas has not been a budget breaker on my list and, in fact, has been quite a bargain. The price of unleaded gas in 1984 was $1.13. Today it is $2. This is a 76 percent increase right in line with the CPI and only a 3 percent per year rise.

So what will the economy, the market and the price of gas look like 20 years from now on the 40th Birthday of Business People? I look forward to telling you in 2024.

Originally published in June 2004 Business People-Vermont