CHART OF THE DAY: A P/E RATIO OF 122?
26 July 2009 by Cullen Roche
6 Comments
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Comments
Actually the TTM (Trailing Twelve Months) P/E is closer to 767!:
http://dshort.com/articles/2009/SP-Composite-pe-ratios.html
The nonsensically high P/E should give any pragmatist a pause on rather P/E is still a meaningful measure in the current environment. Using P/E now is like trying to do physics inside a black hole!
The P/E is currently many times higher than all stock market bubbles! In fact, the P/E of every previous recession were many times higher than all stock market bubbles! Yet, those that buy after the market has crashed have always get better returns compare to the long run market return.
“Buy low sell high” is a much better guide than P/E in the current environment.
Silly,
I agree with you. That’s why in an earlier comment (What’s on Tap)I opined that traditional metrics are out the window now. The only thing that matters is short term directional certainty where a great deal of money can be lost or be made.
Dean and Silly,
Although, I think if you combine Mish’s analysis about the impossibility of a strong rebound in earnings (i.e. we have passed a secular peak) with DS.Short’s comments at the bottom of the link that Dean provides above:
“A more cautionary observation is that every time the P/E10 has fallen from the first to the fourth quintile, it has ultimately declined to the fifth quintile and bottomed in single digits. Based on the latest 10-year earnings average, to reach a P/E10 in the high single digits would require an S&P 500 price decline below 600. Of course, a happier alternative would be for corporate earnings to make a strong and prolonged surge. When might we see the P/E10 bottom? These secular declines have ranged in length from over 19 years to as few as three. The current decline is now in its ninth year.”
I have no idea if this rally has peaked, but I’m still of the opinion that the S&P will at least head into the 700s some time in the next year. My gut says the 600 number that DS.Short references is a real possibility.
My 2 cents.
I have found that PE ratios are a very poor indicator of future returns. Not only are there different ways to calculate them, but the variables used to calculate them are 50% guesses (analyst estimates).
I avoid using PE ratios altogether.
Take a good look at that chart. That’s 70 years of real data. It scares me silly. Nothing in nature goes parabolic and stays that way. Something’s gotta give. People that believe that it’s different this time are deluded.