S&P P/E Ratio Is Low, But Has Been Lower

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Includes: DIA, QQQ, SPY
by: Babak

Tuesday, while meeting with Gordon Brown, President Obama said:

What you’re now seeing is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal, if you’ve got a long-term perspective on it

While cheerleading the US economy and stock market is part and parcel of being the president, his is a fairly accurate description:

SP500 PE ratios long term chart
Source: Prof. Robert J. Shiller

And while some are pointing out a dichotomy between Obama’s pronouncement and his advisor Buffett’s description of the US economy as being in “shambles”, there really isn’t a conflict with the two views as long as you realize that the economy and the US market are two different things.

In any case, the data for February and March 2009 are an estimate only and take us down to 12 - which is without an argument a very low P/E Ratio. But not as low as we’ve seen the price earnings ratio go.

In August 1982, the PE Ratio dropped below 7. And in both July 1932 and July 1921 it went below 6. To see that scenario again, the S&P 500 would have to drop another 40-50% to the 430-360 level (assuming earnings miraculously stay the same).

The only time that the PE Ratio has dropped as precipitously as in this bear market was in the aftermath of the 1929 bull market top. At its zenith in 1929, the PE Ratio was only approaching 33 while in the 2000 market top it reached 44.

Finally, I should mention that this isn’t necessarily the way that others calculate PR ratios - Shiller methodology smoothes out the data over 10 years to remove short term volatility.