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Investing and Economics Blog

Stocks Still Overpriced?

I don’t actually agree with the contention in this post, but the post is worth reading. I will admit I am more certain of I like the prospect of investing in certain stocks (Google, Toyota, Danaher, Petro China, Templeton Dragon Fund, Amazon [I don’t think Amazon looks as cheap as the others, so their is a bit more risk I think but I still like it]) for the next 5 years than I am in the overall market. But I am also happy to buy into the S&P 500 now in my 401(k).

Stocks Still Overpriced even after $6 Trillion in Market Cap gone from the Index

Looking at data since 1936 the average P/E for the S & P 500 is 15.79. The current P/E for the market looking at second quarter data is 24.92. Since that time, the P/E has started to look more attractive but you have to be cautious as to why this is occurring. First, the current P/E ratios are betting that earnings will not take hits in 2009 which they clearly are.
…
Even if we assumed a healthy economy, the price is no bargain. Throw in the fact that we are in recession and you can understand why the S & P 500 is still overvalued. We haven’t even come close to the historical P/E of 15.79 which includes good times as well.

Just to be clear current PE ratios have nothing to do with next year. It would be accurate to say someone making the argument that the S&P 500 is cheap now because of the current PE ratio, is leaving out an important factor which is what will earning be like next year. It does seem likely earnings will fall. But I also am not very concerned about earning next year, but rather earning over the long term. I see no reason to be fearful the long term earning potential of say Google is harmed today.

Related: S&P 500 Dividend Yield Tops Bond Yield for the First Time Since 1958 – 10 Stocks for 10 Years – Starting Retirement Account Allocations for Someone Under 40 – Books on Investing

December 12th, 2008 John Hunter | 1 Comment | Tags: Investing, Stocks

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1 Comment so far

  1. Beware of the Sucker’s Rally at Curious Cat Investing and Economics Blog on May 10, 2009 9:45 am

    […] don’t put much money on the line trying to time the stock market. I thought the decline was overdone and I have found some things to buy. I am not convinced the current assent of the USA market […]

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