4 ms·

I'm a little skeptical of claim #1. According to Reuters, the P/E of the S&P 500 is at 16.1 (see http://www.reuters.com/finance/stocks/financialHighlights?symb

by prewett 16y ago

I'm a little skeptical of claim #1. According to Reuters, the P/E of the S&P 500 is at 16.1 (see http://www.reuters.com/finance/stocks/financialHighlights?symbol=KO http://www.reuters.com/finance/stocks/financialHighlights?sy...; look in the "Valuation Ratios" section in the right-most column). If 16 is the average, then the market is fairly priced. The Schiller figure he references might include all publicly traded companies. If so, it might suggest that less well-known companies (outside the 500 most popular) are over-priced. But since the 500 most popular drive the market, you can't conclude a crash from that. Most large-cap companies I have been looking at are trading at 15 year lows for the P/E, and at close to 15 year highs for dividend ratios. They still might be over-priced in an absolute sense, but we haven't seen prices this good in 15 years.

MikeCapone 16y ago
"If 16 is the average, then the market is fairly priced." I'd rephrase that as something like: If 16 is the average, then the current market isn't historically overpriced. It could still be overpriced or underpriced. The historical average is just that. Current fundamentals aren't necessarily "average".
vomjom 16y ago
The article doesn't make it very clear, but Shiller's number is based on the average inflation-adjusted earnings of the previous 10 years. See the Excel file here: http://www.econ.yale.edu/~shiller/data.htm http://www.econ.yale.edu/~shiller/data.htm The stock market is still very highly priced compared to historical standards (excluding the past 15 or so years). See also the graphs on: http://en.wikipedia.org/wiki/Robert_Shiller http://en.wikipedia.org/wiki/Robert_Shiller
- prewett 16y ago
  I downloaded his Excel sheet (which has more recent numbers than Wikipedia). I'm not sure what he means by "real price" and "real earnings" (as opposed to "reported earnings"?). But if I add a column for "real P/E", it puts us at just under 20, which is on the historical high end. So, following the trend in his data, I would expect the P/E to gradually decline to 15 or so, maybe even down to 10. (Under 10, buy like mad.) However, his data show gradual rises and then declines over a period of 20 - 40 years or so. These are punctuated with sharp drops, but according to these data, I would expect the next correction to drop us down to maybe 18 at most. From some cursory chart exploration on yahoo, it looks like large-caps might not follow the market moves as much. Mar 2009 was about 50% of the S&P 500's current level, but KO only differed by 30% and JNJ only varied by 10%. I'd say solid dividend companies are not necessarily overpriced.
  - phjohnst 16y ago
    Real vs reported means that the real numbers have been adjusted for inflation from some base year (and looking at the CPI from his data, the base year is mid 1983). The problem with looking at such a huge data set (this goes back to the late 19th century, is that the companies, industries and the world that we live in shifts significantly over time. So the 'real' numbers are extremely important, but I'd have to do some more research to find out how his CPI calculations change from one era to another. This is important because (to the best of my knowledge) there is nothing that says that the P/E ratio of a major industrial company in the 30s (thinking like Rockefeller, etc.) is equivalent to that of a big tech company now. So as industries change, investment attitudes, etc. change, which will affect the overall P/E. And as far as the market being expensive in relation to historics, again you have to compare apples with apples. There are more people investing now than 50 years ago, and there are more big companies. Both of these facts will drive up the price of the mainstream companies' shares.
  - anigbrowl 16y ago
    real = adjusted for inflation.
nostrademons 16y ago
The median is about 16: http://www.google.com/finance/stockscreener#c0=PE&min0=15.29&region=us&sector=AllSectors&sort=&sortOrder= http://www.google.com/finance/stockscreener#c0=PE&min0=1... (There were 3891 total companies when viewing the whole market.) The distribution skews high though, so it's quite possible that the mean is about 20. OTOH, just what does a "mean" mean for P/E? Capitalization-weighted? Earnings-weighted? If you look only at companies with a market cap > $1B, there are 1626 firms, and the median is again about 16. Same with $10B - this seems remarkably consistent. http://www.google.com/finance/stockscreener#c0=PE&c1=MarketCap&min1=10680000000&region=us&sector=AllSectors&sort=&sortOrder= http://www.google.com/finance/stockscreener#c0=PE&c1=Mar...

by prewett 16y ago

MikeCapone 16y ago

"If 16 is the average, then the market is fairly priced." I'd rephrase that as something like: If 16 is the average, then the current market isn't historically overpriced. It could still be overpriced or underpriced. The historical average is just that. Current fundamentals aren't necessarily "average".

vomjom 16y ago

The article doesn't make it very clear, but Shiller's number is based on the average inflation-adjusted earnings of the previous 10 years. See the Excel file here: http://www.econ.yale.edu/~shiller/data.htm http://www.econ.yale.edu/~shiller/data.htm The stock market is still very highly priced compared to historical standards (excluding the past 15 or so years). See also the graphs on: http://en.wikipedia.org/wiki/Robert_Shiller http://en.wikipedia.org/wiki/Robert_Shiller

prewett 16y ago
I downloaded his Excel sheet (which has more recent numbers than Wikipedia). I'm not sure what he means by "real price" and "real earnings" (as opposed to "reported earnings"?). But if I add a column for "real P/E", it puts us at just under 20, which is on the historical high end. So, following the trend in his data, I would expect the P/E to gradually decline to 15 or so, maybe even down to 10. (Under 10, buy like mad.) However, his data show gradual rises and then declines over a period of 20 - 40 years or so. These are punctuated with sharp drops, but according to these data, I would expect the next correction to drop us down to maybe 18 at most. From some cursory chart exploration on yahoo, it looks like large-caps might not follow the market moves as much. Mar 2009 was about 50% of the S&P 500's current level, but KO only differed by 30% and JNJ only varied by 10%. I'd say solid dividend companies are not necessarily overpriced.
- phjohnst 16y ago
  Real vs reported means that the real numbers have been adjusted for inflation from some base year (and looking at the CPI from his data, the base year is mid 1983). The problem with looking at such a huge data set (this goes back to the late 19th century, is that the companies, industries and the world that we live in shifts significantly over time. So the 'real' numbers are extremely important, but I'd have to do some more research to find out how his CPI calculations change from one era to another. This is important because (to the best of my knowledge) there is nothing that says that the P/E ratio of a major industrial company in the 30s (thinking like Rockefeller, etc.) is equivalent to that of a big tech company now. So as industries change, investment attitudes, etc. change, which will affect the overall P/E. And as far as the market being expensive in relation to historics, again you have to compare apples with apples. There are more people investing now than 50 years ago, and there are more big companies. Both of these facts will drive up the price of the mainstream companies' shares.
- anigbrowl 16y ago
  real = adjusted for inflation.

nostrademons 16y ago

The median is about 16: http://www.google.com/finance/stockscreener#c0=PE&min0=15.29&region=us&sector=AllSectors&sort=&sortOrder= http://www.google.com/finance/stockscreener#c0=PE&min0=1... (There were 3891 total companies when viewing the whole market.) The distribution skews high though, so it's quite possible that the mean is about 20. OTOH, just what does a "mean" mean for P/E? Capitalization-weighted? Earnings-weighted? If you look only at companies with a market cap > $1B, there are 1626 firms, and the median is again about 16. Same with $10B - this seems remarkably consistent. http://www.google.com/finance/stockscreener#c0=PE&c1=MarketCap&min1=10680000000&region=us&sector=AllSectors&sort=&sortOrder= http://www.google.com/finance/stockscreener#c0=PE&c1=Mar...