Wednesday, June 10, 2009

Investment cataclysm?

The Mogambo Guru points out that the Standard & Poor's 500 Index stands at $940, but the earnings last week were $7.21, a price-earnings ratio of 130.

Historically, the p/e ratio of the S&P 500 has averaged less than 20 - whether you measure from 1881, 1900, 1945 or 1970.

If the earnings don't improve dramatically and soon, the implication is a super-crash. But even if earnings triple from last week's level, that would merely put us back to where we were in December 1999, when the S&P's p/e ratio stood at its highest-ever (up to then) level: 44.2. And as you know, the market went on to halve in value by 2003.

So the S&P earnings have to become three times better than they are now, just to match the pre-Millennium crash conditions.

The dominant feeling I have now is a diffuse sense of denial.


sobers said...

I'm glad I'm not the only one with that feeling. Everyone seems convinced we have just got past one of the biggest credit boom and busts in the last century with (comparatively) little damage. I have a horrible feeling this is not over yet by a long chalk.

AntiCitizenOne said...

Probably the S&P won't rise but QE-inflation will "increase" the profits.

Sackerson said...

Sobers, ACO: good to hear from you both. ACO: when people work out that's what's happening, the crash will happen. There's not so many fools and willing victims as we are tempted to think.