I am trying to compare the P/E today to the P/Es of other major bottoms.
First, thank you everybody for your comments. I am trying to avoid doing something stupid here with my investments, but its a real challenge.
The P/E argument calls for a comparison of the current P/E to that of other major stock market bottoms. By that standard, we could decline another 50% to 70% from here.
"One possible reason that we haven't reached the final lows is because investors
apparently still see stocks as being overvalued," Desmond, president of Lowry's
Reports, told me Thursday. "The price/earnings ratio for the S&P 500
components is currently at approximately 24. Since 1942, the average P/E ratio
at major market bottoms has been approximately 11. The highest P/E ratio seen
at a major market bottom over the past 60 years is approximately 12.5 (in June
1962)."
Desmond, whose work on bear market bottoms won the Charles Dow Award this
year, said the bottoms of October '74 and August '82 saw P/E ratios of about 7.
"During the bubble years, investors got used to everything happening in a hurry.
Now they will have to adjust to things happening more slowly. A lot of cash and
a lot of patience is what is needed now," Desmond says.
So, there is no panic in Detroit, Providence, Eureka,
Tucson or Tom's River. Not yet, anyway. The true
buying in this overpriced stock market won't come
until most Americans have ejected every last
remnant of their withering retirement and taxable
portfolios. By then, the market indexes Wall Street
uses to benchmark its days and nights will be far, far
lower.
"In the years to come," said Desmond, "books
written about this bear market will emphasize the importance of the virtue of
patience." See Paul Desmond's paper on bear market bottoms.
cbs.marketwatch.com
As to the interest rate argument, if anybody has any links or stories to explain it, I'd be very appreciative. Low interest rates have not seemed to help much in Japan. In fact the bubble in the U.S. housing market has an eerie resemblance to Japan's.
I have not read an analysis that compares the average price/cash flow of companies today to those of companies at other market bottoms. Anybody got any stuff on that?
Thanks,
Tom |
