Is the market OVERVALUED - A look at the S&P P/E Ratio
I thought this article added to the 'bearish' points I and others made in response to Rexlove's blog about the market being undervalued based on P/E ratio.
Excerpt and link:
The Multiples Myth
I am getting tired of the endless procession of permabulls who keep insisting that. at a 13 times multiple, the S&P 500 is cheap. The last time I heard this was in 2000, when NASDAQ multiples went from 100 to 50, on their way to 10. Before that, it was in Japan in 1990, when multiples went from, guess what, 100 to 50 on their way to 10. Some 20 years later, Japanese multiples are still at 15.
When I first entered the stock business in the seventies, typical equity earnings multiples were in the seven to eight neighborhood. If you performed exhaustive stock screens, which then involved paging through endless reams of 10-k’s, newsletters, and tip sheets printed in impossibly small type, you could occasionally find something at a two multiple, the kind Graham and Dodd wrote about. Anything over ten was considered outrageously overpriced, fit only to be sold on to retail investors. This is when the prime rate was at 6%.
The selloff we saw this week is consistent with my long term view that we are permanently downshifting from a 3.9% to a 2%-2.5% growth rate, and the lower multiples this deserves. If you had any doubts, take a look at the $24.7 billion in May equity mutual fund outflows, versus the $14.2 billion sucked in by bond mutual funds. I’m convinced that if the circuit breakers had not been installed, we would have been visited by another flash crash this week...