Driven to the same depths?
After the crash of 1929, share prices did not bottom for three
years. And when the long bull market peaked in 1965, it did not
bottom in real terms until 1982. The fall in American share prices
over the past 16 months, particularly in the Nasdaq, may be only
the beginning.
Even at current levels, American shares remain expensive. They
have not tumbled as far as profits, at least as measured under
generally accepted accounting principles (GAAP). By this measure,
the average p/e of the S&P 500 index exceeds 37, an all-time
high. Even using operating profits (adjusted to ignore claimed
one-off costs), the average p/e is 23. In 1929 and 1965, the peak
p/e was 21. Today's ratios are well above the average for the past
century (of 14) or the 17-18 which Jeremy Grantham of Grantham,
Mayo, Van Otterloo, a fund-management firm, reckons is now the
trend ratio.
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