Changes in P/E Ratios During the Current Bear Market 12 comments
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Since the S&P 500 peaked on October 9th, the index is down 17.85%. As shown, Financials are down the most at 43%, followed by Telecom (-27.5%), and Consumer Discretionary (-20.15%). The other seven sectors are actually outperforming the index as a whole, and the Consumer Staples sector is actually up 1.64%.
During bear markets, P/E ratios typically contract as prices fall faster than earnings. During this bear market, the S&P's P/E ratio has risen from 19.62 to 25.67. This P/E expansion can be attributed to the 3 worst performing sectors. Financial and Telecom P/Es have both gone negative, and Consumer Discretionary is pretty much negative at 1,402.
On the other hand, five sectors have seen P/E contractions. Technology has seen the biggest P/E decline, going from 28.19 on 10/9/07 to 21 at current prices. Utilities, Industrials, Health Care and Energy are the other sectors that have seen P/Es contract.
This is definitely a concentrated bear market, where a couple sectors have caused all the problems.
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This article has 12 comments:
When stock price falls/rises so is P/E.
If company earns 2$ per share per year at the average price of 50$ per share then P/E equals 25.
If the same company earned 2$ per share and price of the stock fell down 50% so P/E will be halved too to 12.5 but the valuation didn't got any cheaper as investors don't believe the same company will deliver in the future.And the future nobody knows,what is cheap,what is expensive?Who can tell that?
The only true is that when stock price fall,investors lose and nobody cares about the P/E ratio when your bank statement shows your money been wiped out.
Don't buy into this article,your brokerage statement is the best proof of what you are worth today.
Dump this bloody market,take your money and run before it kills you.
I promise till this December the Dow Jones will be below 9000 at most best possible scenario and P/E of your stock will get even cheaper,so you must chose to take the loss and get burned or buy more to average at lower prices.But this new money will be taken from you too,as bear knows no fear,he will eat as long as you will feed him and there will be many more victims who will show you how nice is P/E of your loser looks when you will lose 50-80% on your best in the world blueest of blue chips.
Dump the grizzly bear before it sucks your blood and soul.
Multiple reasons to love low US inflation
Without fanfare, global equities markets have gained an unexpected fillip this week, with a development that looks capable of firing a fresh round of sharemarket buying support.
The catalyst is a clear break lower in United States long-term inflation expectations. This can deliver meaningful price/earnings multiple expansion for a market showing signs of wanting to track higher.
Over recent weeks, the S&P 500 has lifted almost 10 per cent, whilst the technology-based Nasdaq has climbed some 13 per cent. Even more impressive has been the recovery in the Value Line Index. This equal-weighted, broad-based equity index is more than 17 per cent off its lows.
This has reversed half of the losses that accrued from the 2007 high.
Whilst to date this recovery has been a stop-start affair, it's demonstrated an investor willingness to look beyond what will inevitably be a sluggish period of global growth over coming months and to focus instead on the expected recovery as 2009 unfolds.
But a fresh impetus has emerged, following a drop to new five-year lows in a reading of the implied long-term level of US inflation.
US 10-year Treasury Inflation Protected Securities, or TIPS, generate one of the best guides to investor expectations for inflation in the US. The "expected inflation" reading is calculated by deducting the yield on the inflation bond from the yield on the standard 10-year Treasury bond.
As oil threatened to break above $US150 a barrel in early July, this closely watched measure of long-term inflation pushed to a two-year high above 2.6 per cent.
But this week, with oil falling sharply, the TIPS inflation reading has dropped back to 2.14 per cent - a level last seen in October 2003.
Inflation expectations have a major impact on equity pricing - in particular a stock's price/earnings multiple. Higher inflation assumptions drive a lower P/E pricing environment, whilst diminishing inflationary concerns will invariably allow market multiples to expand.
Over the past nine months, with soaring energy and food prices raising inflationary expectations, equity markets have been subjected to significant P/E compression.
Morgan Stanley calculates the forward P/E on the S&P 500 at just 12.8 times - compared with more than 15 times in mid-2007. According to Goldman Sachs JBWere, the Australian market multiple is now less than 12 times - against readings of about 17 times in late 2007. These are levels not seen since inflation last spiked in the early 1990s.
But the shift in inflationary expectations over recent weeks has been dramatic. Sharply falling food and energy prices have had an immediate impact on investor thinking. So long as this sentiment shift is maintained, investors will soon take a second look at P/E pricing. And there is much to like about the prospect of market multiple expansion when pricing is already looking historically cheap.
A second positive has emerged over recent weeks. The dramatic recovery of the US dollar is supporting the view that the greenback may be in the process of reversing what has been a savage seven-year bear trend.
This is important as recent analysis has suggested that a strong US dollar is usually accompanied by above-average equity returns.
This may seem counter-intuitive, given the support offered to the US market over the past year by a weaker dollar. Exporters have benefited from a lower greenback, ensuring that net exports have largely been responsible for keeping US gross domestic product growth on a positive trajectory.
But given the long-term nature of dollar trends and the natural propensity for equity markets to rise, on average shares will tend to advance whether the dollar is moving up or down.
So it's the quantum of gains that accrue during periods of US strength or weakness that differentiate the relative appeal of the dollar trend.
US fund manager Bespoke Investment Group has calculated the average return of the S&P 500 during US dollar bull markets is more than 80 per cent. During periods of US dollar declines, the return falls to less than 20 per cent.
Given that equities and the US dollar may be undertaking coincident trend reversals, this prospect of 60 per cent relative trend outperformance bodes well for investor returns.
Yes, for now. I remember managing client's portfolios in 2001 and thinking, gee this isn't so bad; all the value stuff has helped clients do OK. Of course, then 2002 came around and the bear market arrived in earnest.
I heard on my radio that now is a great time to buy stocks and properties. So what, if the banks are collapsing? Who cares if the government is going broke? Who worries about all those homeowners not paying the mortgage?
Happy days are here again! We're in the money! 42nd Street, here I come! I want to be in a Busby Berkeley tap dance movie!
Whew. I knew this was a comedy site! As the world slides into a mega-recession, all our trade partners are doing everything in their power to drop the value of their currencies, deny there is any inflation and thus, kill inflation!
So what, if jobs are disappearing. Who cares if wages are falling. It doesn't matter that international trade is going totally cut-throat! Did you hear that the Disney people are making an ALL TALKING/ALL COLOR 'Snow White and the Seven Dwarves'? Technology in action!
We need to fear nothing but fear itself, as Roosevelt said.
Baron Rothschild was asked how he made his fortune, over the course of the 19th century. He said "when the streets of Paris are running with blood, I buy".
When asked by a reporter why he would increase capital gains taxes, Obama replied that the government needed the additional revenue. When the reporter retorted that was he aware that Bush's tax cuts resulted in more tax dollars pouring into the government, he was totally caught off guard, and replied "well if that is so, it is still only fair"! Welcome to his idea of government, Comrade!
Webisking that buying high p/e works only during bull markets.