If Tennessee’s football team wins eight games this season any reasonable observer would describe it as massive improvement. When the Volunteers won eight games in 2000, fans were generally disappointed.
When measuring change, the beginning point matters.
The Butch Jones era began in the athletic equivalent of a horrible bear market.
Last week I saw an old friend who complimented me on my weight loss. I’ve actually gained a few pounds in the past month, so he caught me off guard. That is, until we realized that our last face-to-face visit was more than 20 years ago—when I was about 70 pounds heavier.
When measuring change, the beginning point matters.
If you want to predict how the stock market is likely to perform during a U.S. president’s term, look at the market valuation and performance immediately prior to his inauguration. If a president comes into office when stock prices are at a historical extreme, it’s a good bet the market will, at least, revert to its mean valuation.
The S&P 500 increased 130 percent in President Obama’s first six years in office. Why would a guy so concerned about the middle class and growing income inequality work to make Wall Street rich guys even richer?
He didn’t.
The number of long-term unemployed is nearly twice as many as when President Obama took office. Fifteen percent of Americans receive food stamps. A record number of working-age adults don’t work. Household income has declined. The labor force participation rate is the lowest since Jimmy Carter was president. Recent popularity polls indicate declining support and favor for President Obama in every area of performance.
The stock market was at such a low when Mr. Obama took office (the S&P 500 PE ratio was 10 times earnings) there was very little he could have done to prevent a market rebound.
If the beginning point of success measurement matters, then we ought to be able to forecast coming periods of success or failure if we are measuring from an extreme point.
What if your secret profit prophet told you that Company A was about to enjoy a record decade in which its revenues would soar, earnings would almost triple and its debt would decline as a percent of assets?
That describes Walmart from 2000 to 2009, a decade in which Walmart’s stock declined 23 percent.
If the value of a business is determined by its earnings, how can a tripling of earnings result in a loss for investors?
In 2000, Walmart’s stock price traded at more than 40 times earnings, compared to the overall market’s long-term P/E ratio of 15. To justify that price in 2000, Walmart’s revenues would have needed another 15 years of such extraordinary growth that the company’s sales would now be twice GDP of China.
The beginning point matters when anticipating change, too.