Yardeni's metric is PE relative to interest rates. However, the 1930s & 40s market remained extremely undervalued by the metric for many years as I understand it. Also, the E in PE is very much in doubt - are they going to have pricing power to recover lost earnings ground, and are the numbers they're giving honest? I'm actually more interested in price to cash flow, which I haven't found anywhere.
Also, all that really seems to stop secular bears is price to book value, revenue, and dividends. These are cold, hard valuation floors. On all these measures, we remain substantially overvalued.
Another note on Yardeni: he uses US treasuries for that comparison. That is *not* the correct yardstick. I think the bond market is a far better evaluator of risk than the stock market, so I like to use investment grade bond yields as my yardstick for comparison to earnings.
economagic.com
On this basis, stock PEs are overvalued, not undervalued. Interesting to note, as well, that corporate interest rates are essentially flat around 8% since 1993.
BC |
