He has a very valid point, there is no talk of valuation out there currently. That both creates tremendous markets swings and for the patient of us, tremendous opportunity.,
I thought that these charts (below) told the story of the credit freeze. I think the Traders rule at the moment. Valuation for the moment does not carry much weight. The forecasted earnings yield of ~8.6% 12mo forward for SP500 seems to stimulate some to forecast worse earnings than this in order to get their 20 secs on CNBC. I interpret these charts to indicate that it appears that earnings are forecasted to be well below the long term trend. I do have a chart that takes the earnings trend back to the late ‘40’s with what appears to be the same variance within the same channel at ~6% compounded for the entire period. Today forecasts are well out side the historical range.
To get a similar collapse of valuations in the past required a high rate of inflation, 1974 and 1982 both had 7 P/E’s and 12%-14% earnings yield range. This was required. I have observed that since 1978 when we have reasonably good data that the market requires a return that provides just over 3% Real Rate of Return. In 1982 with core inflation (see Dallas Fed trimmed mean PCE data 1982 inflation at ~9%-11% + ~3% Real Rate of Return = 12%-14%) in the 11%-12% range the SP500 earnings yield was in the 12%-14% range.
Over the past few months 12mos forward earnings yields have ranged over 11% to the current ~8.6%. The market appears to be pricing inflation in the next few years at the 5.5%-8% range or a period of earnings well below that which has been in place since the 1940’s.
I cannot forecast the future any better than the many professionals who are paid handsomely to do this. But, I do not think our national productivity, our willingness to work our desire put our kids through school and our general improvement of our condition has not changed from last year to this. My view is that the SP500 which represents some 90%+ of US public companies mirrors the results of these efforts. We can measure this with some certainty since the ‘40’s. We have certainly had many issues along the way. We have always recovered.
Disclosure (“none” means no position):
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