Are stocks cheap or not? Valuation of the S&P
Well I've done some more digging into the valuation of the S&P today. This is subject to much controversy, debate, and discussion. One of the bears favorite things to do these days is to parade around a chart showing that the S&P has a sky-high p/e of 100some, using it as proof that we have to immediately have a market crash. Bulls counter with arguments about operating earnings, mark to market mirages, how far stocks are down, how many years its been w/o appreciation in stocks, green shoots, and more.
As I blogged a week ago or so here on the CAPs game blogs, I calculated these for the S&P going by Zacks Research Wizard output and filing in the blanks in the Zacks data with data from Yahoo Finance.
price/earnings (forward): 12.6
price/earnings (current year): 14.5
GMX pointed out that estimates are not GAAP earnings, and there we go... discussion over, flame war between bears arguing that stocks are 10x overpriced and bulls arguing that its cheap seems to be the only likely outcome for a discussion based on p/e.
I spent many hours last night surfing the web and crunching numbers yet again. I found some very nice resources including:
http://www.barra.com/Research/fund_charts.asp this very nifty link allows you to make plots for various indices over various time periods for various valuations. Downside: it ends in 2005
http://www.comstockfunds.com/files/NLPP00000/030b.pdf This very nifty file shows the price/book of the S&P over the last 32 years. The average value is 2.4, they report more optimistically (i.e., cheaper) than I do that current elvels are about 1.6-1.7. Their graph shows 1.7, but the S&P is lower now than on the last date of the graph.
Comstock Funds are more or less permabears. Basically every article and post on their website is bearish, they advocate shorting today (i think, read for yourself, odn't take my word for it), they lost alot of money shorting the NASDAQ bubble (they may well have ultimately made a ton of money ont hat too, but they were really early in shorting it at any rate), and they would make all but the most extreme bears happy with their commentary. But they have a cheaper value for the S&P than I do. So lets just take their word for it.
From their chart, the S&P is at a lower price/book than at any time since Black Monday in 1987. Thats a 22 year low, its well lower than the historical average of 2.4 (the 50 year historical average, BTW, is closer to 2.6).
At the march lows the price/book was cheaper than at any point since 1982, the onset of a nearly 20 year bull market.
EXTREMELY INTERESTINGLY, in the 2002 bear market stocks never dipped to the average (almost, but not quite), and never went below it. This time, even after the recent "rally", we are well below the average.
From the barra funds link, current price/slaes of the S&P (0.9) is as low as any time since the recessoin/bear market in 1991. An 18 year low. At the march lows it was at a 25 year low. Lower than black monday.
From the barra funds link, current price/book of the S&P (1.7) is at about a 25 year low, lwoever than any time since BEFORE black monday. At the march lows this was comparable to the 1981 lows, and lower than any other time ont he graph.
IF we take the forward p/e of 12.5, as offered by Zacks rank, thats also at a 20+ year low. I don't care to debate p/e in this initial post, feel free to debate it below.
Moving beyond price/book, price/sales, and the rather controversial price/earnings, lets look at the value of the S&P divided by the GDP in billions. I calculated these numbers myself from year-end closing values of the S&P and GDP figures taken from a gov't site.
It works out like this: average of (S&P year end closing value / GDP for that year) is 8.5%, going back to 1950. At year end 2008 we were at about 6.3%, the lowest in 18 years. Currently, assuming a 2% decline, we'd be at 6.5% or something. At the march lows we were at 4.6%, the lowest we'd seen in 25 years.
So stocks are without any real room, in my view, for debate, cheap right now. Impressively cheap. To shed some perspective on the cheapness, lets take a look at valuations at the 2002 bottom.
Price/book simply reached the historical average (we are well below that now, FAR FAR FAR below that at the march lows). Price/sales simply reached the historical average (we are well below that now, far below at the march lows). Etc.
In 2002 stocks were of average price. In 2009 they are cheap.
To add more to this (and I wish to cripes I could post a picture, like those super-slick posts the TA guys make, which are pretty, very pretty), in 2002 we dipped merely to the long-term S&P trendline. In 2009 we are well below it even today, vastly below it at the march lows.
Stocks were cheaper at the march lows than they were at any point sicne the very early 80's at the bottom of the last big bear market before the 20 year run by price/book, in 25 years by price/sales, and so forth.
Stocks are still well below historical averages today by price/GDP, price/book, price/sales, and possiblyu price/earnings (although price/earnings is, as I mentioned, subject to some controversy right now. I don't think many bears have even a basic grasp of how mark to market accounting works).
In 2002, the first acute bear market in what will probably be a 15 year secular bear market by the time its done, we dropped merely to the historical averages. In 2009 we have gone vastly below them. I wouldn't be surprised to see the markets languish below them for several years... until a couple years into the next secular bull market. But ... I'd also be surpised if we see anything even resembling a retest of the march lows, and I wouldn't be surprised if dips in the next few months are the cheapest stocks are in the next decade.
I am not a prophet, unlike the average bear or person looking for tremendous recognition on the internet, I do not presume to know the future or to be better than you at making investment decesions.
But I did get the only "A" grade in a calc based stats class in 15 years at my college, and I am able to say that stocks are cheaper today by price/book, price/sales, or price/GDP than they've been in 20 or more years.
I can not over-stress how important I think it is toscrutinize your long positions and makesure you are comfortable not with the ommentum, butwith the underlyingcompanies and stocks, and comfortable that they still have room to move up.
I cannot, nor hardly, predict if stocks will be up or down in the next day, week, month or even year. But I do submit that it would take an unreasonable mind, looking at only the facts that they want to see, to argue that they are overpriced. I cannot see any reason to assume that the market will act rationally, but it might. :)
But stocks are cheap today, and I think it'd be tough for a reasonable mind to argue that.