I wrote about the P/E Ratio almost two years ago and how it could be a warning sign and a leading indicator. Today, lets review where it stands and see if it's back to value.
As you can see in the Shiller chart below anytime the ratio rose above 20 (red line), the markets eventually had a huge crash. Just look at the peak in 1929, each of those crashes wiped between 60% and 90% of the stock markets value. This means that up to 90% of a retirement accounts values were decimated.
What's even more important historically is that once the stock markets P/E ratio falls below 10, markets are positioned for a very long and powerful bull market. This is confirmed by viewing the bottom in 1920, 1933, and 1983.
Hold on Livio, what about 2009? The P/E dropped from 44 down to 15, was that good enough? NO! OK, then when will it drop all the way below 10? Certainly, it will not happen next week, but at 29.51 now, you can see that when a market correction does occur, it has serious downside crash probability.
Another point I would like you to be aware of . . .
The financial press talks and acts like 20 - 25 P/E ratio is the norm, it's not. The public is always led to slaughter like sheep. A quick glance at the chart again will show you how much time, since the 1800's, the P/E ratio spent between 20 and 25? About 15% of the time, and most of it is since 2000, which is even more frightening. Todays retirement investors who think their investments are safe and never going down because "the P/E ratio is fairly" normal are being setup. They should have some vehicle to protect their retirement when the markets turn down for real and for a long time! InterAnalyst has that vehicle and your retirement account
History repeats and as history has proven, there is a reason for the average median being around 16.
We posted an emergency market update for our members 5 minutes ago, go there to learn more.
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Livio S. Nespoli has been a broker, registered investment advisor, and financial publisher since 1985.