For those who believe that valuations are presently low the following is from Rap's thestreet article:
"Turning to the other side of the balance sheet, rather than look at P/E ratios when considering the big sweep of things, I have often preferred to talk about market cap compared with GDP. For those not familiar with that ratio, at the peak in 1929, it was 75% to 80%, and it never rose above 100% until 1996. In fact, this ratio had only surpassed the high 70%s for one quarter, briefly, in 1968. (This information also comes from the most recent monthly piece by the Leuthold Group.) Where we stand today is that market cap to GDP is about 100%, down from a peak of 160%, plus or minus, in March of 2000. Obviously, one could look at a chart and see in some cases that the market has corrected to 1996 levels. But one should remember that on this basis, there was nothing cheap about 1996.
Of Median Strips and Accidental Reports: People sometimes like to take the tack of asking, what is the median for the market-cap-to-GDP level? Since 1926, that is about 51%. So if we were to trade back to the median, the market would get cut in half. Now if one looks at a chart of this, as I have over the years, one sees that the market only accidentally trades at the median. It tends to trade way above it, or way below it. My gut feeling is that considering our recent period of insane overvaluation, we could have a period of quite cheap stocks, but it doesn't have to work like that. In any case, there's the math. Based on this ratio, stocks could become far cheaper, which is obviously what I believe and have been saying." |
