Are P/Es Too High?
Board: Macro Economics
One hears a lot of claims that the stock market is too "rich." They never seem to give reasons why. I'm not sure it is a good way to tell whether stocks are "rich," but P/E* is at least one way.
The P/E of the DJIA on January 31st 2013 was 15.29. Actually this number is close to average, and it is certainly no where near 2007s high of 22 (the last time the S&P500 broke through 1,400), though higher than a year ago at 14. The P/E of the S&P500 is a tad high at 18.31 and higher than a year ago at 15.11 but not screamingly so.
Interestingly the DJ Transportation Index has actually fallen from a year ago 18.31 vs 20.94 so it looks like a correction may be going on. The same is true of the Russell 2000 that has dropped to 31.65 vs 44.40 a year ago.
I admit that the DJ Utility Index does appear to be over bought at 22.18 vs 14.33 a year ago, but that is not what the hysterical comments are about.
All in all, I think this stock market has a ways to run though one might be careful of the Russell 2000 and the DJ Transportation indices where corrections seem to be going on, though the yields are improving there. The DJ Utility Index looks overbought and even the yield has dropped for some reason. However, our particular holding here of Big D (Dominion Resources) and Duke Energy seem to be performing well.
*See http://online.wsj.com/mdc/public/page/2_3021-peyield.html The table does not state whether the numbers are arithmetic mean or geometric mean.
A problem with P/E is that negative P/Es (or losses) are entered just as zero. If a rigorous P/E was used, something like the NASDAQ 100 might be considerably higher.
Still, the P/E for the March low in 2009 of the S&P500 was 116.31, but it was even higher on June 30th at 122.4 (http://en.wikipedia.org/wiki/Price–earnings_ratio). Actually this was a good buying point wasn't it?