Stocks: cheaper, but still not cheap

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Stocks: cheaper, but still not cheap

Sunday, January 18th, 2009 | Economics |

Think the stock market is cheap? Let’s do the math. The S&P closed [2008] at 910. If those earnings estimates hold, the effective PE is 21.53. The historical average PE is about 15. At a PE of 15 the S&P would drop to 634. That is a huge drop of 30% from today’s closing price.

What happens if the stock market over shoots as it typically does in bear markets. Assume a PE of 12. At 12, one might expect to see the S&P at 507. That would be an even bigger decline of 44% from here.

Paying attention to those historical norms is important. The historical norm for the ratio of home mortgages to incomes was about 3 to 1. During the real estate gold rush that ratio got completely out of control - hitting 5 or 6 to 1 in some areas if you compare median home prices to median incomes. That wasn’t sustainable and now real estate prices in those areas are coming back down in a hurry.

2 Comments to Stocks: cheaper, but still not cheap

W.C. Varone on gold, guns, and food | Les Jones
February 18, 2009

[...] S&P numbers start with 6, or preferably 5, but not when they start with 7. Mish maintains and I agree that stocks are still too high. Even as low as they are now, they’re still too high. If [...]

Congress plans to give FDIC $500 billion for failed banks (UPDATED) | Les Jones
March 6, 2009

[...] any banking stocks or insurance stocks (AIG was primarily an insurance company). More to the point: unload stocks now. The Dow is at 6,594 and the S&P is at 682. Notice how both numbers start with 6? They’ll [...]