Are Stocks Cheap?

Not really — but how “not cheap” depends upon how you measure earnings and handle one time write downs.

First up: NDR:

“Ned Davis Research looked at market valuations after bear markets since 1929. The firm found that in the first three months after bear markets, the market’s P/E tends to climb by about 10 percent. And the multiple has traditionally expanded 22 percent in the first six months after a major market downturn.

But since March 9, when the recent rally began, the P/E of the S.& P. 500 has jumped nearly 40 percent. Such a surge in P/E ratios may be warranted if the recession ends soon and profits recover quickly. While there are some signs that the worst of the recession may be behind us, few analysts expect profits to stage a major rebound. And, of course, it’s still unclear whether the recession and the bear market have ended.”

The article also notes, however, that stocks are not terribly cheap ex-one time write-downs. If we look at just operating earnings — excluding one-time write-offs — the P/E of the S&P500 is 22, hardly bargain priced.

NDR also looks at P/E in an interesting way — instead of just adding up all the SPX earnings them dividing into price, they assess each individual stock P/E ratio. Then, they find the median P/E for the group — the midpoint, with 250 stock P/Es above and  250 stock P/Es below.

The result? The median P/E of the S.& P. 500 is 15.6 — well above the median P/E of 12 in March, but below the market’s historical median of 16.5.


This Rally May Need a New Source of Fuel
NYT,  June 13, 2009

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