News Home
Home - Index -
News - Krisen 1992 - EMU - Cataclysm -
Wall Street Bubbles - Huspriser
Dollarn - Biggles - HSB - Löntagarfonder
- Skuldkrisen -
webtips -
Links - Contact
På börsen har det rullande p/e-talet för de kommande 12 månaderna kommit ned till 12,1
Det är den lägsta nivån sedan sammanställningarna inleddes i början av 2003.
Snittet har under perioden legat på 15,0.
DI 2007-11-27
Equities look overvalued, but where is the turning point?
Martin Wolf, Financial Times, March 7, 2007
Some analysts are prepared not only to explain day-to-day movements in markets, but to predict them. I am neither clever enough for the former, nor rash enough for the latter. I am prepared, however, to make four statements:
first, a period of market volatility is welcome;
second, core equity markets do look overvalued;
third, that this does not appear to be the case is due to the extraordinary condition of the world economy;
finally, the big question is how long those conditions will endure.
Any long period of market stability encourages speculation. Taken to excess, such risk-taking, particularly when fuelled by huge amounts of borrowing, can create significant instability.
The chart, taken from data prepared by London-based Smithers & Co, shows the actual and the cyclically adjusted price-earnings ratio of the Standard & Poor’s composite index since 1881. The cyclically adjusted measure follows the method of Professor Robert Shiller of Yale university: it is the ratio of stock prices to the moving average of the previous 10 years’ earnings, deflated by the consumer price index.
The picture shows that the actual p/e ratio is now very close to its long-run mean of just over 15.
The most recent cyclically adjusted p/e ratio, however, is 26.5, or about two-thirds above its long-run average.
It is not as astronomically high as in 2000, but it is very high, by historical standards.
What is going on? The answer is that the US – and, indeed, most of the world – has experienced an enormous surge in corporate earnings.
It is always a mistake to confuse a cycle with a trend. In the case of corporate earnings, it is worse than a mistake, it is a huge blunder.
The intense cyclicality of corporate earnings is the most important reason why the unadjusted p/e ratio is a worthless indicator of value.
If we are to assess when that might happen, we have to recognise that the buoyancy of corporate profitability is just one of several extraordinary features of the world economy. Here are a few others:
dynamic and now widely shared growth;
low real interest rates on risk-free securities;
low inflation-risk and credit-risk premiums
and so low nominal interest rates;
huge current account “imbalances”;
and low inflation, in spite of big rises in prices of commodities, especially oil.
Some of what we see is also surprising. This is particularly true of the association of rapid global economic growth and high profitability with low real interest rates and little concern about inflation. A world such as this is one in which one would have expected high real interest rates and worries about inflation, not the opposite.
But the biggest risk is that the end of the US property boom will persuade US households to tighten their belts at last, thereby ending the US role as the world’s big spender before the big savers are prepared to spend in turn.
If the stock market were to drop 20%, then the P/E ratio gets to 12, assuming earnings don't fall.
Of course, they will, but they are also likely to rebound as quickly as they did after the last recession.
Now, let me speculate. Go back to 1974. Were we at the low in terms of valuations at that time?
No, the P/E was 11, which is admittedly low, but it was going to 7 in 1982
John Mauldin, February 2, 2008