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On the March 9 anniversary of the stock market implosion a year ago, a front-page story in the Wall Street Journal featured one of the same bears making the same bad argument he made a year ago.
The article, "Worries Rebound on Bull's Birthday," was almost entirely devoted to trying to explain a graph by Robert Shiller of Yale, titled "Stocks Still Expensive." The New York Times ran the same graph on March 15, 2009, to warn us that the ratio of stock prices to earnings "hasn't fallen as far as the market bottoms of 1932 and 1982."
By then, reports from Barron's, Bloomberg and the Wall Street Journal had already suggested that the Dow could fall to 5000 and the S&P 500 to 500. The Journal's headline on March 9, 2009, was "Dow 5000? There's a Case for It."
All such ill-timed warnings relied on falling valuations, not falling earnings.
Writing in Forbes.com last March 12, Nouriel Roubini found it "realistic to expect that the multiple may fall in the 10 to 12 range," so he concluded that "the S&P could fall to 600 ... or even to 500 (10 times 50)."
Now, fast-forward a year to Shiller's newest graph in the Journal. It displays his "cyclically adjusted" ratio of current S&P 500 stock prices to company earnings over the past 10 years.
By splicing together antique stock indexes as though they were comparable to today's S&P 500 companies, the data reach back to 1881. The 130-year average is 16.36. Because of that, the Journal explains, Shiller "has found that when this ratio has gotten above 20, as it is today (20.64), it has signaled that the stock market was expensive and sooner or later would hit a stretch of subpar returns."
Suppose you could accept Shiller's idea that it makes sense to link today's stock prices with profits over the past 10 years rather than profits in the future. Would shunning stocks when Shiller's index topped 20 actually be a hot tip about market timing?
Here's the bottom line: Following Bob Shiller's "over 20" rule would have kept you out of the stock market every single month from December 1992 to September 2008. All that time Shiller was presumably scolding investors, warning that "sooner or later" there would be a market downturn.
Since downturns are bound to happen, sooner or later, there were a couple of times Shiller's rule might have seemed prescient. Yet anyone acting on that do-nothing advice continually from 1993 to 2007 would have forgone many lucrative investment opportunities.
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Posted By: Conventional Wisdumb(40) on 3/13/2010 | 11:01 AM ET
I am not sure what point the writer is trying to make about the market. With two massive selloffs over the past 10 years a buy and hold investor has lost so much money on an inflation adjusted basis that you have to wonder if the stock market is anything other than a volatility casino. If you can time it you will win, if you can't well the Nasdaq is still 60% below its all time high nearly 10 years ago! The S&P 500 needs to rise 35% more to get to its peak of Oct 07!
Posted By: MaxiLeery(20) on 3/13/2010 | 9:09 AM ET
The real problem with "Average" P/E ratios: From time to time stocks have prices many times greater than earnings. Between the 1st Quarter 2000 and 4th Quarter 2009, several stocks had P/E ratios in excess of 500. EBAY's P/E was 5000 in 1Q2000, Honeywell - 1440x. It doesn't take too many of these to lift the average P/E to values above 20x. The median P/E for the last quarters ending Dec 2009 was 17.6 vs. the average 21.4, with the latter including negative P/Es. Yearly medians = 15.5x.
Posted By: acierno(1290) on 3/13/2010 | 7:09 AM ET
a stopped clock is right twice a day. if you want to know when to by and sell stocks i can suggest an excellent book by bill oneil- hey, as a matter of fact this is his newspaper.
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