Sunday, September 29, 2013

Hussman on Valuations


At its recent high of 24.6, the Shiller P/E (the S&P 500 divided by the 10-year average of inflation-adjusted earnings) matched the level that was observed in September 1929, exceeded the peak of 23 reached in March 1937 (the S&P 500 lost half of its value over the following year), matched the extreme of May 1965, which ushered in a 17-year secular bear market, and significantly exceeded the level of 19.8 seen at the August 1987 peak. [...]

A second feature that draws complacency is that the Shiller P/E broke above 27 at the late-2007 market peak, just before the market lost 55%, making present valuations seem not-so-high by comparison (“a Shiller P/E of just 24.6? We spit at your Shiller P/E of 24.6!”)

A third feature that draws complacency is that profit margins are about 70% above their historical norms, making raw P/E ratios (particularly those based on “forward operating earnings”) seem fairly reasonable.

1 comment:

Stagflationary Mark said...

Does this mean that the Fed might not have permanently put a stop to recessions?

Although there have been 19 recessions since the Fed's creation in 1913 (roughly one every 5 years), I really thought they had an epiphany during the Great Recession.

Too much sarcasm? ;)