Tom, Forbes columnist Ken Fisher has a different view...
[snip]
>many cite the market's high P/E, fretting further that it is higher now than in early 2000. All true--and normal. The market's P/E usually is higher at a bear market bottom than its prior peak because as a rule earnings disappear faster than stock prices.
Counterintuitive, but history shows there is simply nothing about P/E levels, cut any way you want, to help predict market tops or bottoms, or market levels several years out. That we believe otherwise is mythology. If you want more on this, see my Fall 2000 Journal of Portfolio Management article (co-written with Meir Statman), "Cognitive Errors in Market Forecasts." Nor does finance theory suggest the P/Es should be predictive. Theory would have you flip it on its head, as an E/P, the earnings yield, and compare that with interest rates. Hereto, nothing much is revealed. For example, the E/P divided by the 90-day T bill rate is boringly in the middle of its historic range.
P/Es often skyrocket around bottoms and thereafter because of all the writedowns. Correctly calculated, the market's highest P/Es ever were in 1920, 1932 and 1982, three of the five best times to buy in the last century.< [snip]
The whole article Message 17839777
Gottfried |
