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

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:

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.

Comments

[Alex and th...:]

Good article! This may keep some folks from making the mistake of bottom-fishing right now.

Mar 05 08:29 AM

[foxy 44:]

nice graph, but 2009, 2010 get close to zero.
US economy worse than 1929 I am affraid.

Mar 05 08:52 AM

[CoinMiner:]

While price has started to look attractive, it has looked that way for a while (think of the same mantra as hears last October, last November, this January, last week, November 2007, etc). Unfortunately, these 'analysts' have forgotton the other side of the equation: Earnings.

Funamentally, why will GM, BAC, GE, or any of the other sickly large american corporations begin to earn more money next quarter or even next year? They won't, the fundamentals aren't yet there (the consumer is retreating back even further).

Moreover, those earning statements in 1929 and 1991 didn't have the same 'pro rata' bias which propelled the Nasdaq and SP into bubblemania in the late 90's and early 00's.

An even more systemic problem is the current finance 'leaders' search and push to do away with that pesky 'mark to market' requirement.

Stay sane out there.

Mar 05 09:13 AM

[Clark80:]

If the stock market is supposedly a forward looking mechanism, wouldn't the forward PE be more relevant? I've seen '09 S&P 500 estimates averaging around $32, with a low of $28, providing a PE of somewhere between 22 and 25. The chart spends a lot more time below these numbers than above them.

Mar 05 09:41 AM

[User 259493:]

PE (trailing 10 yr avg earnings)


Current 12.26


LT avg 16.34


min 4.78 Dec 1920

max
44.20
Dec 1999

80's trough
6.95
March 1982









**s&p at 400 (another 30% drop) would imply 7.0 PE, still not cheap by

historical trough standards

Mar 05 10:06 AM

[y3115y:]

It would be much higher when co incomes are coming down.

Mar 05 11:01 AM

[retired avi...:]

Seems to me that what matters to anyone looking at P/E and considering a long position now is 'normalized' future earnings in years to come. Earnings during the current massive writedown and contraction stage will be meaningless after the writedowns are done and falling demand has ultimately leveled off.

The question is in picking the equities that will weather the storm and have intact businesses in the aftermath, and guessing what their earnings and earnings growth will be. I say 'guessing' because this great debt unwinding is uncharted waters and estimates a few years out are a complete grope in the dark.

The market is in deepest despair so stocks will likely fall more, but ultimately will undershoot intrinsic value at some point and the S&P will be a strong buy. Those who say 'buy and hold is dead' are dead wrong. The conditions for 'buy and hold' will be recreated. It could be several years off or just months. The plummeting market will create an excellent buying opportunity at some point. The question of course is how low does it go.

In the meantime S&P earnings are likely to keep falling and P/E not so useful a tool.

Mar 05 11:04 AM

[xmaitlandx:]

>>>Finally, I should mention that this isn’t necessarily the way that others calculate PR ratios -<<<

'PR' Ratios, huh? Very telling, whether fruedian or calculated.... Public Relations has as much or more to do with the caculation as Price and Earnings anyway, these days.
I appreciate the reminder of how much the news is structured to elicit a certain reaction.

Mar 05 11:19 AM

[M dub:]

Babak, it is nice to see someone at least writing stuff that has data or a pretty chart. I'd like to see some more details about R Schiller's chart - i assume its TTM or last year's earnings? Not sure that's comparable to 1900, but 1982 perhaps.

However, the problem with *everything* right now is precisely what the point is with this chart - that is, look at historical data and performance and predict future results. Problem is, this only works when it does then it doesn't.

The 1929 stock market crash was induced by a speculative stock lending bubble, some speculative lending, perhaps Smoot Hawley etc. The 1982 recession was energy and inflation. While it has to be something, I would say the massive credit fueled bubble now I is much broader - housing, consumer, commercial RE, and bank / finance companies. My point is that this time around, Trailing Earnings and future earnings will barely resemble one another. The "cheapness" of equities can be a complete mind *&ck as earnings get decimated and also as the government bails out creditors at the expense of equity holders.

For common stocks, in 2009, past data and future results are not a smart man's game.

Mar 05 11:42 AM

[Fred Voetsch:]

Unfortunately the lies continue.

The P/E ratio is currently around 30 for the S&P 500 and rising day by day as earnings drop faster than stock prices.

The lie is that people are using operating earnings which are not the same earnings that would have been used on the chart shown. Operating earnings are a fairly new creation of the past few decades used to hide the truth (lie) about earnings and a company's true value.

Take a look at S&P's own data:
www2.standardandpoors....

WIth the S&P at 700 the as-reported earnings P/E ratio is at 40 and the operating earnings P/E ratio is at 14.

Even if you wish to lie to yourself and use operating earnings 14 is 40% from 10, which is what many are commonly using as the current P/E ratio.

Note that S&P itself predicts the as-reported earnings P/E ratio will be 181 on 9/30/2009 and the operating-earnings P/E will be 20 on that date. Earnings and P/E ratios then magically get better and better even as the economy continues to deteriorate...good luck with that.

It is only when we begin to deal in the truth that we will be able to solve the problems we have. We apparently are far from that point, based on this article and many other sources I have seen lately.

A smart investor only deals with the truth and not these polyanish lies. Our economy will recover and the stock market will rise again but using bad data to predict it will only lead to your financial ruin. Just ask yourself how that has work for the past year and a half.

Mar 05 12:47 PM

[gator1:]

I'm sure y'all noticed obama doesn't know the difference between
the price/earnings ratio and the PROFIT/earnings ratio(an obamaism)--------does he hate capitalism or what!



On Mar 05 08:29 AM Alex and the red piano wrote:

> Good article! This may keep some folks from making the mistake of
> bottom-fishing right now.

Mar 05 03:15 PM

[gordon:]

As Clark posted, earnings of $30... X 10= a S&P 300! Recession p/e is 5-8, sorry bulls. Consumers took about $600-700 Billion out of their home equities for EVERY YEAR 2003-2008 and SPENT IT. Where are companies going to replace these profits? Exports? Bull. The gov't can't replace this either. Tell Obama.

Mar 05 08:01 PM

[Jade Queen:]

I don't think that misstating Profit/Earnings means that Obama hates capitalism. It likely means he isn't used to talking about these things and hasn't been corrected by anybody, so he made a mistake he probably wishes he had not made. I hate it when I get caught on video mispronouncing things, but it happens. The guy has a lot of power, and he beat Hillary by being a cooler head under pressure and by not stooping to demonize, which she seems hard-wired to do.

I second the comments above that indicate this isn't a time to buy things based on historical bets on the over-all market. Big chunks of the market are likely going away, while the ones that have looked long-term are going to do better by far than the market over-all.

I'd rather eye-ball the percentage of whose computers are sitting on the tables in on-line coffee shops than bet on the over-all market any time soon.

Mar 10 07:01 PM