Joseph, I am not going to argue with Graham, but it should be pointed out that any type of valuation should be made in respect to other available investments, and thus somehow, the equation should also include the type of returns available on no growth "riskless" securities such as bonds, or at least their return (expected) after inflation. Right now we have relatively high returns on bonds, which can pull valuations higher on stocks.
Of course markets go to extremes both on overvaluation and undervaluation, if we get a real bear market the SPX PE might even go under 10. I do not see, yet such a scenario (it could develop), and if we do not sink to the depth of despair, the decline in the interest rates on treasuries, might serve as a cushion to stock valuation.
Zeev |
