Stock market P/E ratios are a mean-reverting phenomenon. Over the past 135 years, stock market P/E ratios have explained about 50% of stock returns over the subsequent decade. During the three periods starting on 1/19/1906, 11/28/1929 and 5/14/1965, market P/E ratios declined between 65% and 75% over the next 14 to 20 years. During the three Bull periods (8/24/21, 6/13/49 and 8/12/82), the stock market’s P/E ratio rose between three- and five-fold.
P/E Ratio: Cyclical Expansion and Contraction
Source: Bronson Capital Markets Research
We may be in the same cycle where P/Es are contracting. Market Analysts like Bob Bronson expect the next cycle to start with a market P/E ratio below 10, sometime near Oct 2014.
Why aren’t we saving more
Quote of the Day:
“A loss never bothers me after I take it. I forget it overnight. But being wrong –not taking the loss—that is what does damage to the pocketbook and the soul.”