Stock Valuation
February 23, 2010
– Comments (6)
I love the graph on this Big Picture post.
So, the graph is suggesting looking at what the market would be priced at for a P/E value from a low of 8.33 to a high of 16.35 giving a range for the S&P based on P/E today of 384 to 753. That makes it over valued from the expensive side of that range by 45%. That range is their long time average plus or minus 1 standard deviation.
It is a real shame that Greenspan was so influencial. The monetary expansion that occured under his rein truly distorted values of everything, stocks, home prices, wages in some sectors relative to others, huge mal-investments and poor deployment of capital because of cheap access to capital.
The distortions essentially hid the degree of economic imbalance and encouraged foolish financial behaviour. And it royally screwed financially prudent people. Take a young couple that been taught the old wisdom of saving 20-25% of the value of your home before you buy it and were saving at the beginning of Greenspan's financial destruction of the economy. Well, if you were following a plan that ought to have gotten you further ahead, as it did in the past, well, Greenspan would have cost you your economic future. An affordable home at say 2.5-3 times household income would have you needing to save 50-60% of your household income. That would take you probably 3-5 years depending on how aggressively you saved. Well, 5 years later you would have 20% of the old home price, but there would have been a good chance the home prices went up more then you could save. In Vancouver home prices doubled about a 7 year window and they never came back to affordable levels. Jumping in with a foolish 5% down ended up being the "wise" economic choice because of that moron being at the helm.
Mathematically, we should all be better off if we concentrate on paying ourselves first and reducing debt. Money in savings and debt at the same time creates a spread that the banks take. Paying the spread to yourself should make you better off finanically. Somewhere because of low rates it came to make sense to borrow to invest. So, of course money that ought not be in the market is going to increase demand for stocks and push the price up, along with an aging population. If you are being responsible, you are putting money aside for retirement, well, with an aging population that is going to create more demand for stocks.
So, today the S&P is priced 93% higher then its long term average.
I can't help but think there is going to be some major price corrects as some of the factors that increased demand for stocks reverse, ie, people pulling money from stocks increase of increasing stock investment.
What is interesting to me, when the market reached it low before this rally, it was where I was considering looking at the market again, and that was pretty close to the long term average valuation for the market.
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