Investors are paying 56% more for every dollar of real earnings in modern times than they used to. Prior to 1983, the average CAPE ratio was 14.7, and for the last 33 years it has risen to 23. There are plenty of reasons (stories?) for why multiples expanded in the bull market of the 80s and 90s, but one that I hadn’t considered was recently brought to my attention in Robert Shiller’s Irrational Exuberance (emphais mine).
The Financial News Network, founded in 1983, was later absorbed into CNBC. Then came CNNfn and Bloomberg Television. Together, these networks produced an uninterrupted stream of financial news, much of it devoted to the stock market….So many clients would call to ask about something they had just heard on the networks that brokers began to seem behind the curve.
According to a study by Richard Parker, a senior fellow at Harvard University’s Shorenstein Center, newspapers in the last two decades of the twentieth century gradually transformed their formerly staid business sections into enhance “Money” sections, which dispensed useful tips about personal investing. Articles about individual corporations that used to be written as if they would be of interest only to those involved in the industry or the corporations themselves were then written with a slant toward profit opportunities for individual investors; these articles regularly included analyst’s opinions of the implications of news for investors.
According to a 2004 study by James Hamilton there had been a gradual decline over the preceding several decades in the “hard news” content of the U.S. television evening news in favor of news that is either of story quality or of immediate use to the viewer. Hamilton attributed this change to the increasing competitiveness of the news media business, and competitive advantage increasingly depends on maintaining marginal customers who are less interested in depth of understanding. News about investing tips naturally prospers in such an environment.
Enhanced reporting of investing options led to increased demand for stocks, just as advertisements for a consumer product make people more familiar with the product, remind them of the option to buy, and ultimately motivate them to buy. Most advertising is really not the presentation of important facts about a product but merely a reminder of the product and its image. Given the heightened media coverage of investments, as stocks market boom should come as no greater surprise than increased sales of the latest sports utility vehicle after a major ad campaign.
The financial media was definitely responsible for fanning the fire of public enthusiasm for stocks in the 80s and 90s. And while it’s impossible to know how much of the multiple expansion they’re responsible for, it’s an interesting angle that I never really thought about before.