Early last month, the Dow Jones Industrial Average (DJIA) crept to within 3.8% of its 2007 all-time high. Barron's ran a cover story in mid-October extolling the virtues of owning stocks again. The index then dropped almost 600 points since its recent top.
How does the current valuation compare with the 'should-have-been-sold' peak of five years ago? The 9-year chart (shown below) shows the DJIA's levels and P/Es at some key lows and highs since the start of 2004.
Please note that I have used actually reported GAAP earnings, rather than the adjusted numbers often relied upon. On that basis the 30-stock index showed four down year-over-year comparisons during those eight years. My chart noted intra-day peaks and lows rather than strictly closing prices.
Full year DJIA earnings of $831 were first seen in 2007 as the index touched its all-time high. Dow profits fell 20.5% in 2008 and dipped another 5.6% in 2009. The two-year cumulative earnings decline totaled 24.9%. Even so, the DJIA over-reacted by plunging by 54.4% when measured at the March 9, 2009 bottom.
The economic hit to company profits was very real. But... the share price declines more than discounted the bad news. To get the best bargains you had to buy when the news was still bad and had yet to turn the corner.
Legendary value investor Sir John Templeton used to say:
If you wait to see light at the end of tunnel… you've already missed the bottom.
It took three years to regain exactly the old summit of $831 in DJIA earnings. Economic metrics were substantially improved from 2009, but at the 2010 low, the DJIA was still 32.3% cheaper than the 2007 high. The DJIA was then bargain-priced at a P/E of just 11.6x.
Last week's closing price of 13,093 puts the Dow Industrials at just 14.1 times trailing 12-month results of $927 (source: Barron's Nov. 5, 2012). That is relatively low compared with most pre-recession bottoms.
Importantly, it comes with the least competition from fixed income that has occurred throughout the lifetimes of most of us. 10-year treasury bonds are paying a meager 1.682% right now. Here's how the present DJIA stacks up to their old high point.
Low fixed income rates due to the Fed's ZIRP (Zero Interest Rate Policy) make stocks look like the best game in town. Shares are not priced for perfection as they were back in 2000 at the height of the tech / large-cap growth / internet bubble.
European woes and fears of another recession have pushed prices on many cyclical companies' share to single-digit levels. That suggests the stocks may not do badly even if corporate EPS do come in below year-ago levels.
I have been a buyer of Caterpillar (CAT) , Air Products (APD), Deere (DE), Cummins (CMI), Emerson Electric (EMR) and Johnson Controls (JCI) over the past month or two. These are proven long-term winners that were already discounting fairly pessimistic expectations.
Ironically, Barron's October 29th issue reversed their prior bullishness. That might have swayed fickle investors into selling, rather than buying, now that the DJIA has pulled back a bit.
I see the current prices as quite attractive in lieu of all available alternatives. You can see some of my other favorite stocks, and why I like them, by using these links to other recent Seeking Alpha articles.
I feel much safer (for the long-term) holding shares of high-quality, conservatively financed companies as opposed to fiat-based paper money such as Euros and the $US.
Central banks can print unlimited amounts of banknotes. They can create billions in electronic credits. They can never conjure up profitable businesses, though. To weather the coming devaluations in paper money, you'll need to own assets that can be marked up when the "full faith and credit" instruments are marked down.
Today's market offers fine opportunities.