Tuesday, October 4, 2011

Back to '08 valuations

This chart shows Bloomberg's calculation of the S&P 500's PE ratio using 1-yr forward consensus earnings estimates. By this measure, the market today is only a shade less pessimistic about the future than it was towards the end of 2008, when a multi-year global recession/depression was widely expected.

What this tells me is that if you are still bearish about the stock market's prospects, then you must also believe that the future is going to be even worse than a global recession/depression. If the global economy ends up experiencing anything less than what is almost a nightmare scenario, then stocks are selling for bargain-basement prices.


McKibbinUSA said...


Benjamin Cole said...

I wonder if the USA stock and real estate markets are telling us something else--not recession, but nor recovery either. A Japan.

In the USA we are roughly following the Japan approach to a real estate bust-recession, and that is tight money but fiscal deficits.

It didn't work in Japan (for 20 years and counting), and the market is telling us that it will not work here. In this regard, I agree with the markets. The stock market did well during our QE efforts.

We have crushed inflation, and it will remain dead, I am sure of that. Derive psychic income from the death of inflation, as you sure are not going to derive any real income from it.

marcusbalbus said...

well we certainly know what you think

Frozen in the North said...

Yeah market is rather gloomy, but what happens when "analyst" revise their forward earnings? Based on a strong and optimistic growth model of 3% plus the earning multiplier should be higher than 11x, but if the market view is that for the next few years its 1% growth that will rule America, then the market pricing is right.

Moreover, everyone recognizes that corporate earnings as a proportion of GDP and in the nose bleed zone. Market seems to be making the assumption that, earning growth is limited -- especially if America gets a Japan (never mind the sh$t storm in Europe...), then (at least in the s/t) the market reactions are natural "ish".

As for McKibbin's comment: Right behind you buddy!!!

As a semi-pro (I work in the market but in the derivatives segment "all vol is good vol" business), what is amazing is that the entire room (there's 250 guys & galls in here) is very very long FI, and has surprisingly small equity exposure.

Bottom line, the house says "the best way to make money in the market is not to lose money".

sgt.red.blue.red said...

I have been buying during the recent decline, purchasing FUSEX, FSIIX and FSEMX on down days only.

John said...

"if you are still bearish about the stock market's prospects, then you must also believe that the future is going to be even worse than a global recession/depression."

With HFT and fancy software, long term growth is unnecessary to make profits in the stock market.

We small investors increasingly don't trust the financial sector. It's a rigged game, the house always wins. If they don't win, the big ones get bailed out. The old saying is "pigs get slaughtered" but that was our fathers' stock market. Not the one we see today.

The zombie 401k sheep who mindlessly and automatically purchase murky mutual funds through their bi-weekly payroll deductions are the ones getting slaughtered now.

To invest wisely, we should invest in skills and equipment that help us be better at our jobs, and prepare us for the new jobs we want.

I pulled out of stocks several months ago and haven't regretted it one bit. No plans to return, either.