P/E vs S&P 500 (50 Years)

Friday, December 30, 2005 | 10:16 AM

As promised, today brings us to the 4th in our series of charts: 

P/E vs S&P500
click for larger chart


courtesy of Mike Panzner, Rabo Securities


I'll get into the significance of what this means to the markets later, but for now, note where the P/E is over the median, and its impact on market performance.

Stocks, while not terribly expensive, can not be called cheap by historical measures. An even more discouraging mesure on this comes from Clifford Asness of AQR Capital Management (via Mark Hulbert).  He calculated the P/E ratios for the entire market for the 1871-2003 period at ~11. That implies stocks are even less cheap (or more expensive) than the past 50 years implies.

Regardless of whether you take the 50 year or the 132 year perspective, the theory of Reversion to the Mean implies that stocks are likely to become cheaper so as P/Es revert. And one shouldn not expect the market to stop at fair value, as we have seen, the tendency is to overshoot on both sides.




Our 3 prior Charts:

Friday, December 30, 2005 | 10:16 AM | Permalink | Comments (21) | TrackBack (4)
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Listed below are links to weblogs that reference P/E vs S&P 500 (50 Years):

» P/E vs S from A Dash of Insight
Take a look at this great chart of P/E versus the SP 500. It does a wonderful job of setting up the valuation question. You can see what is wrong with it, even without looking for a better model. The [Read More]

Tracked on Dec 30, 2005 9:36:10 PM

» P/E Expansion and Contraction from The Big Picture
Last week, I showed a 50 year chart of the SP500, focusing on the P/E over that time period. Today's chart covers the same issue, only we focus on the 1982-2000 Bull market. Some people argue that P/E expansion wasn't all that significant; they say it ... [Read More]

Tracked on Jan 2, 2006 12:01:06 PM

» Some Last Week Of Trading from At These Levels
I find it interesting that everyone assumed, including yours truly, that in a flat year the last low-volume week of the year would be up. It isn't. It will cover one more model I have that was screaming duck since Tuesday, but after the close [Read More]

Tracked on Jan 2, 2006 12:50:09 PM

» P/E Ratios, The other elephant in the room from xml.metafilter.com
Down, but pehaps not down enough P/E Ratios historically revert to 11, at least from 1871-2003 after [Read More]

Tracked on Oct 9, 2008 8:44:47 AM


My understanding of stock market performance is that over the long run, the return on stocks should be equal to earnings plus dividends, plus a "valuation factor" that the market places on the two (P/E or P/BV). If P/E's are getting closer to the 50 year median, perhaps we can expect returns to more closely match earnings and dividend growth going forward (assuming stocks as an investment don't fall out out of favor with investors). I'm not sure one can use the 132 year median P/E of 11 as the reversion level, given the improved information around stocks since the Securties Exchange Act of 1934 - better information means investors are willing to pay more (higher P/E).

Posted by: Erik Alberts | Dec 30, 2005 11:17:08 AM

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