Equity Market - Reality Check

dOcs: where, what, why "normalized 8x multiple" ?? BTW, Heard one of the bigger shops dropped their forecast $51 last Wed

I think the range from 1960-today has been 7-30

"During the Tech Bubble, the S&P saw a 50% retracement from its peak. That was a relatively "confined" bubble, both regionally affecting mostly only the coasts of the US and not having really a broader international effect. Today, with Autos/Real Estate/Finance sectors all collapsing, we are still only 52% off peak"

Not a meaningful comparison. The Tech Bubble you speak of was IN STOCKS. We didn't have an equity bubble this time to start (and, in fact, the returns over the past few years were actually not that good).

Or, another way to think of this... we are SUBSTANTIALLY below the LOWS of the tech bust.

I read that historically 10 has been on the low side, 20 on the high. Recently, obviously, we've been much higher. Overshooting down usually leads to about a 7x multiple. Earnings figures have been varying widely, alot depends on which accounting methods you use.

This was already discussed. PEs off short term profits aren't super meaningful. Better to compare to 5 years or 10 years. The analysis done said we could go 30% lower... but that was when we were 15% higher...

god forbid we should discuss something again. just joking, 10022. I read an (as reported) earnings estimate for S&P companies in 2009 of around $33 recently.

nyc10022, from 2003 the S&P has rallied 100%, (16.5% annualized), admittedly not as great as the Tech Bubble, but still impressive. If anything, the fact that this bubble is not equity related is even scarier. It is not a numerator driven collapse, but earnings driven. Not only are the earning power of corporations in question, in large part so are their solvency. GE CDS is trading in the 700s, and the company will likely be downgraded.

i dont know how you can say we are substantially below the lows of the tech bust...future eps are a shot in the dark at this point as are dividends. SP500 just dipped below 700 fyg

> nyc10022, from 2003 the S&P has rallied 100%, (16.5% annualized), admittedly not as great as the
> Tech Bubble, but still impressive.

Thats cherry picking... you're taking a market crash. Try the 10 year return.

Or how about this.... negative return for the last 10 years... tech bubble didn't do that...

http://economix.blogs.nytimes.com/2009/03/02/stocks-finally-start-looking-affordable/

At long last, stocks are beginning to look cheap.

With today’s declines, the long-term price-earnings ratio of the Standard & Poor 500-stock index is down to about 12.3. Over the past century, this ratio has averaged about 16. So relative to corporate profits, the stock market now appears to be undervalued by about 30 percent.

For months now, we have been following the stock market’s decline here at Economix and arguing that the market was not as inexpensive as many others were arguing. Our case: Despite the enormous fall in stocks, the long-term p-e ratio — that is, the ratio based on the past 10 years of corporate earnings — was still roughly at its historical average.

But the declines over the last few weeks are starting to change the picture. I crunched some of the historical stock data kept by Robert Shiller, author of “Irrational Exuberance,” and it offers some reason for optimism. When the p-e has been between 12 and 13 over the last 125 years or so, stocks have doubled over the next decade, on average. (Adjusting for inflation, they have risen almost 50 percent.)

Over all, there is pretty direct correlation between the p-e ratio and future long-term returns. For example, when the ratio has been between 15 and 20, stocks have risen only about 50 percent over the next decade. When the ratio has been above 25, stocks haven’t risen much at all.

So does this mean stocks are finished falling? No.

In the other two great bear markets of the past century, in the 1930s and the 1980s, the p-e ratio ultimately dropped to about 6 or 7. So stocks may well continue to fall. They may even still fall a fair amount.

But long-term investors — and that describes most of us — should start to feel perfectly fine about buying stocks.

Thanks, ak... that was the analysis I was referring to.

Equity has always been an illusion.

That's great news for those of us that went cash last winter.

Why would anyone buy stocks, ever? Public companies are just used as piggy banks by their executives and boards. I'll just keep my cash and buy more real estate in a year or so. I'd rather pay a management company 4% of revenue than invest in a company that distributes 50% of revenue to it's employees.

Jazzman, are you joking?

Burkhardt: you went cash and you still want to move to Maplewhatever? Stay gold, stay strong. I know the forces are strong, but your defences must be stronger.

Granted I don't mean never buy stocks, but generally investing in equities is totally over-rated and totally over-recommended. There are so many ways to invest your money, why do so many invest such a large part of their portfolio in equities? I use to trade equity - the only guys I know who have made money in equities over the last 10 years are either in the fee business or trade off "information." The equity investors just haven't done well over the last 20 years. On the other hand, my friends who have been in the "value add" world of real estate have hit homeruns. Even with today's prices they have done much better than they would have done had they invested in equities.

jazzman, you do have a point. buying stock from a company with unfunded pensions is nonsense. IMHO it's also nonsense buying from those that keep on diluting the stock by granting options to employees. i prefer a fixed salary, there's no proof that diluting my holdings gives me superior management and performance.

I personally think it's ridiculous to use long-term pe ratios. When times are booming, everyone talks about forward P/E ratios and how even though trailing PE's are ridiculously high, forward ones are not high and the stock is no longer overvalued. Well I guess now that we're in the bust period, we'll just use the average of the last ten years of earnings and say that stocks are once again, cheap. I feel like I'm dealing with a broker here.

FYI, if the s&p were at 700, the 12 month trailing PE would be 32.41 and the forward PE would be 21.60. That folks, is not cheap. Seven times forward earnings (as mentioned as a possible bottom in the article) gives us an S&P500 of 226.89. Or 178.08 if you use past 12 months.

(data taken directly from S&P webpage. go to http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_500/2,3,2,2,0,0,0,0,0,0,5,0,0,0,0,0.html and click on link for spreadsheet)

imsobroke, pe using 10 year earnings (trying to take into account earnings throughout the cycle) does have predictive power. it was suggested by graham and there's a paper by shiller were he shows what a good measure it is.

now it's 14 using this measure instead of the avg of 10, so stocks are NOT cheap. when you calculate using certain measure, you have to stick to that measure for the benchmark too, hence the 10 versus the 15 that the forward pe uses.