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The Market's About to CRASH! S&P P/E Told me!



September 23, 2015 – Comments (2) | RELATED TICKERS: TWTR , AMZN , FCX

I love when pundits look at the S&P's P/E and say that the market is about to crash based on the "historically high levels".  Note this link:

 Henry Blodget notes that the S&P is at "historically high" levels (highest other than 1929 and 2000!!).

 But this is based on the Schiller SP10 index, which takes into account history.  Now, let's look at the "Real" S&P P/E Ratio chart:

What is most interesting to note here is the SPIKE in 2009.  According to this chart, based on evaluations, when would the ABSOLUTE WORST time in history been to invest?  In January 2009.  Hmmmm.  Let that sink in for a minute.  

Here's why P/E charts are indicating much more bullishness than you will see on CNBC:

1)  Notice in the previous link that the "Current S&P 500 P/E" is 19.53 (on 9/23/2015), but the "Median" is 14.6 and the "Mean" is 15.55.  Now, I'm no mathemetician, but  . . . . wait - I AM a mathematician!  What this means is some big company's "Reported" earnings are bringing the whole index down.  So, why?

2)  These are based on PRIOR earnings and do not take into account future earnings.  Many of the S&P juggernauts (or former juggernauts) rely on commodities pricing (Oil & Gas, Mining, O&G Services, Mining Services, you get the idea).  Any idea what has happened to commodities in the past few years?  Do you think that trajectory (toward $0/lb for you-name-it commodity) continues?  Me neither.

3)  There are some REALLY CHEAP companies out there.  80% of my TOP CAPS Performers (these are the ones with the HUGE price run-ups) have Forward P/E Ratios UNDER 12.5.  Needless-to-say, many of my WORST CAPS performers' P/E Ratios are even lower.  This isn't reflected in a S&P Average chart, which includes many big-name companies (often with little to no earnings) sporting ridiculously high multiples (did I say Twitter and Amazon out loud?).

Bottom line:  Invest based on what you think the US economy will do.  Look around you - are the highways busy?  Are the malls' parking lots full?  Is it difficult to get a movie ticket for a premier?  Are the gas stations empty?  Then it is time to worry.  But that's not what I see where I live!! 


What is  


2 Comments – Post Your Own

#1) On September 23, 2015 at 2:41 PM, anchak (99.91) wrote:

Other than the flaring title - I thought the business insider article was a relatively well wrtitten and well thought out one.


Whether one likes it or not - Historical trailing P/E has proven to be a much more accurate ( this is a relative term - I personally would prefer "informative" - from a scientific perspective) than Forward P/E - which based on analyst estimates - which can vary widely and be biased.


Shiller P/E is based on 10 Year trailing As Reported Earnings Vs Price - and its also Inflation adjusted. Most research articles show that if the Shiller P/E is in the top percentiles by rank - historical forward 10yr ( because that's the window of the metric) - returns are in the lowest 2-3% percentile - ie negative correlation.

But Shiller P/E is a not a timing mechanism - as the chart shows - it hit Top percentiles back in 1997-98 ( The NOW right part of the chart wasn't even there - so it would have looked  darned scary - and sure possibly with LTCM - looked prophetic too - but then did that blitzcreig from 1999-2000 to rise from just under 30 to about 45!

It remained pretty darn high ( because it has the 10 year lookback) in the 2003-07 bull ....and then from about 27 level - came down in the 08-09 bear - as earning and prices literally started plummeting.

The interesting comparison here is the "coincidental" or current P/E ratio - which hit the Highest level ever in Q1 2009 - as Earninings literally vanished while S&P still had a price ;)  !!!!

Extreme's have a way of informing something.


BTW on your point (1) - I think you are misinterpreting the Mean and Median of the Current p/E - its based on time - not on Companies - You can see that from the Min and Max calculations

Anyway here are my takeaways/thoughts:

(1) There will be a bear market in the next 7-10 yeas - the Shiller P/E is a harbinger of that. Note that it's expectation is 2-3% (real growth rate)/year ie positive- Thus in the middle if the market goes up 20% - the ride down can be really hard say 50% - and then a gain up like 80% - still brings the 10yr  around that mark - which is really what it looked like in 2007 and possibly the same around now too ( like 2005 to 15)

ie "Low Decades"

(2) There should AT LEAST be some sort of a technical rally in the Oil& Exploration markets  - most likely this year itself. Will it be the bottom? 

(3) The neighborhood/community activity check ( like mall foot traffic etc) are great barometers - but they lag. I distinctly remember noticing it in June-July 2008 - by which time - the S&P and banks had taken that huge summer tumble - and commodities were rolling over too...... and a LOT OF PEOPLE thought it was the bottom of the market.

 However - I do agree that you should invest on what the Economy would do .....  unfortunately there's not much of a crystal ball which foretells that - current Economic growth is still expected to be positive - although earnings are sluggish - infact Energy posted a negative quarter in a long while.

Hope it added value to your thoughts
All the best! 










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#2) On November 07, 2015 at 2:06 PM, ozzie (99.87) wrote:

Thanks anchak!  You are right, I was misunderstanding the mean/median numbers.  

 My problem is a stubborn belief that commodities should go up in price as we approach sub-5% unemployment.  That one still baffles me.  I think I may not be fully valuing what happens when the world's largest economy moves from capitalism to socialism.  So all of my commodity stocks (those that haven't already gone bankrupt) look freakin' cheap to me while folks are harping "historically high valuations!!".  The second largest coal producer in the US has a market cap of $32 million (yes-that's with an "m"!).  Strange days.

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