P/E ratio

S&P 500 PE ratio - Google Chrome_2015-06-24_12-00-55

You can find this Chart of the Day at; <a href="http://www.chartoftheday.com/">Chart of the Day</a>. This is semi-log scale so the highs do not look so high. The average seems to be somewhere around 16 to 17 so we are presently running about 25-30% above that. The P/E ratio is, of course, a function of both the P and the E, so if the ratio is extraordinary high or low the extreme can be caused just as easily by an over- undervalued market as by stellar or appalling earnings. But this website adds a nice perspective; https://cyclesman.com/a-look-at-the-1966-to-1974-bear-market-and-why-we-may-now-be-facing-a-very-similar-setup   I certainly did not know this but according to the author of this website there is a tendency for the P/E ratio to equal the dividend yield at the lows. Applying this to the “great recession” low of 2009 it is pretty clear that the P/E stayed above , say, 17 or so but the yield was well below 3%. The conclusion is that that therefore was not a major low! It is still to come according to the author who makes a pretty convincing case based on cycles.

P/E Ratio April 20 (Fortune 500 list)

The Fortune 500 list just came out for 2009 (covering 2008). No big surprises, Exxon overtook Wall-mart and so on. Of course the Fortune 500 list is not the same as the S&P500 but who cares, in broad terms they should approximate each other. Earnings dropped from $645bln to $98.9 a mere 85%. Using the usual “ceteris paribus” this implies that the P/E ratio, which , for the sake of argument , was assumed to be 16 ( I have no idea what it was) is now 107, but after the give or take 50% drop in stock prices, about 53. Cheap? Only in comparison to the 70 on the Nikkei back in 1989.