Anyone using PE is going to be wrong in the current environment.
When the pool of "demand" grows faster than the pool of "supply", prices (and PEs) rise. In the late 1990's we had a burgeoning investor class.
However, as the bubble wore on, there were more stocks available than investors. It took awhile to take root, but it finally did. Once it did, prices fell, and companies went bust.
This has an effect on PEs. Prior to the Great Depression, PEs were very low. Afterward, they were much higher (I believe it was 8 vs 14). The roaring 20's were very similar to the 90's in that investors stormed into the market.
Today, we have gone from about 14 (in 1982, that was what I was told standard PE should be) to somewhere in the 18-24 range. Primarily due to the increased pool of investors, but an increased pool that is attracted by large growth figures.
Maintaining those growth figures, and placating the investors, is the tough part. You can't have 14% growth forever. You can't have 8% growth forever. Eventually, you'd be the entire GDP. |
