Using data from Robert Schiller’s spreadsheet, it looks like the S&P 500 has a current PE of 15. The average PE for the 128 years Schiller has records is on the order of 16. So, for the momentum players we are below average, and that’s bullish.
Here’s my problem: it’s been 25 years since the PE for the S&P 500 has been in the single digits, and the important thing to remember about an average is sometimes the PE will go above the average and sometimes below, but usually there is regression to the mean.
Anyone looking at Schiller’s spreadsheet knows that the PE for the past 15 years has been well above 20, much less 16. And it hit an all time high in the 40s in 1999. Yet when the buzz ended in 2002, the hangover was not so horrible with the S&P500 sporting a PE above 21, with the PE above 25 for most of the rest of the decade.
There was another 25 year span where the PE stayed in single digits, from 1949 until 1974. I’m not saying that we can’t stay in the double digits longer, maybe we can. After all, from the point where Schiller starts computing the S&P’s PE in 1881, it stayed in double digits until 1917-- 36 years. And that includes the Great Depression of 1893, and the Panic of 1907.
But let’s review when the S&P fell into single digits:
- 1917-25, World War I and on into the twenties (8 years)
- 1932, the bottom of the Great Depression
- 1942, U.S. enters World War II
- 1949, U.S. enters Korean War
- 1974, the great recession
- 1977-84, the great inflation (7 years)
I don’t know what they will label the period we are living through, but GDP is falling, unemployment is rising, and housing starts are falling. GM and Chrysler are nearly out of business. It feels like a depression to me.
By the way, Sisyphus sounds like he would fit in with the CEO, trader crowd. Avaricious and deceitful, he was famous as the craftiest of men. He seduced his niece, stole his brother’s throne, and betrayed Zeus’s secrets. He felt he was a peer of the gods. When Zeus had had enough, he forced Sisyphus to roll a boulder up a steep hill, but before he could reach the top, it rolled down again. And to do this without end.
I’m thinking that the overhead resistance is going to get heavier and heavier the higher the averages take us.