IS THE STOCK MARKET 26% OVERVALUED?
The latest data from Robert Shiller’s 10 year PE ratio shows the market currently at a 20.64 multiple. In his morning note, David Rosenberg noted that this is 26% higher than the long-run average:
“If there was an impediment, in addition to a murky economic outlook, it is valuation. There were revisions to the Shiller valuation data and the latest reading on the normalized real P/E multiple is at 20.64x, up from the 20.0x in February and 20.5x in January. The long-run trend is at 16.36x, suggesting that the S&P is currently overvalued by 26%.”
This chart provides little of utility in and of itself, but combined with a longer-term look at stock prices it raises some interesting thoughts. As a student of and believer of mean reversion, I just can’t help but wonder if the recent recovery in stocks is nothing more than a brief respite in the long-term “chop” that has become a defining characteristic of equity prices over the last 10 years.
Source: Chartoftheday, Shiller Econ & Gluskin Sheff
when i look at the first chart, i see that the pe10 hasn’t been this low in the last 15-20 years, except for the dip last fall2008/spring2009…but then again, i am bullish so my view must be discounted…
forgot to mention that the earnings we are getting now under very low interest rate conditions (red line) should be valued more than earnings accruing under high interest rate conditions (lower discount rate in a discounted cash flow analysis), so that the current nominal pe10 is artificially high…except that conclusion doesn’t comport with rosenberg’s thesis so he ignores it.
I like Shiller’s 10 year PE. It is something which is easy to explain to an unsophisticated inventor (such as myself), and it makes sense.
Thanks for posting the PE update.
Implied 5% earnings yield plus a 2.9% cash dividend in the DJIA doesn’t seem out of whack versus 3.60% in the ten year.
Unless you are mega bearish, the stock market looks like fair value at worst, and a buy if you are forecasting any GOOD news…
Now if you are seeing an earnings bloodbath – different story.
You pays your money and you takes your chances….
Yes, Chris, similar low inflation low interest rate environment as 1960s, when PEs were in high teens & 20+.
Chris Said:
forgot to mention that the earnings we are getting now under very low interest rate conditions (red line) should be valued more than earnings accruing under high interest rate conditions.
I disagree with Chris.
REAL Interest Rates are below 0.
Given Normal Interest Rates–Earnings would be less in a stable business model.
Consequently the current earnings should not be valued more but LESS.
But on to your “Bullish position”
Here is a publication from the St. louis Federal Reserve.–24 pages
http://research.stlouisfed.org/publications/usfd/20100304/usfd.pdf
Pages 3,14 and 15
Show Correlation between the AMB,Crude Oil Spot Prices and the S&P 500
The rational of the Monetary Base is that this money HAS to go somewhere–
Its not going into consumer/commercial loans
Its not going into Housing
IT IS Going into Risk Assets/Commodities.
Who said “Follow the Money”
Tsst — ignore Treasury rates. Use Baa corporate rates.
http://alephblog.com/2007/07/09/the-fed-model/