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Strategies & Market Trends : Investor sentiment surveys - a technical indicator

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To: Anaxagoras who wrote (72)	6/30/1997 11:02:00 AM
From: Q.	of 167

The p/e of the S&P 500 should depend on two things: earnings growth rate and interest rates. Interest rates matter because they provide an alternative place to invest your money. I calculate that earnings growth for the S&P 500 has been 18% over the last year, based on the data in Barron's market laboratory section. My main point though is from an empirical, rather than a fundamental, point of view. Historically, the S&P 500 has never stayed above a pe of 20 for more than a couple of years. You can read about this in a very good article online at princeton.edu FWIW, on Friday the S&P 500 traded at 22.05 X trailing earnings. Look at figure 4 of the article cited above for a historical plot of the p/e of the SP 500. That's the basis for my empirical point. The stock market doesn't stay above a pe of 20 for more than a couple of years. That's not a sufficiently precise time scale for market timing, though, which is where investor sentiment surveys come into play.

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