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The following chart was published on March 27, 2002. Six and a half months later the S&P 500 was down over 30%!
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Chart of the Day
With the S&P 500 PE ratio currently sitting at 45.7, some investors are understandably concerned. To illustrate this concern, the inflation-adjusted S&P 500 is presented in the top chart and the S&P 500 PE ratio is presented on a logarithmic scale in the bottom chart. The bottom chart illustrates how the PE ratio has traded in three trading ranges over the past 4 decades. When viewed in this way, you can see how stock prices tended to correct soon after the PE ratio peaked at the top of its trading range. The reverse has also been true with stock prices often rallying soon after the PE ratio was near the bottom of its trading range. Where do we stand now? Currently, the PE ratio is at the top of its trading range suggesting that investors are optimistic as they are willing to pay relatively high prices for stocks. For the PE ratio to drop back down to the bottom of its trading range either earnings must improve or stock prices must decline. With earnings not expected to improve dramatically over the near-term, concern over relatively high PE ratios is likely to continue over the coming months. We’ll keep you posted...
Notes:
- PE ratio based on the S&P 500 and S&P 500 reported trailing 12-month earnings.
Source - Standard & Poor's
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Quote of the Day
"I have never been satisfied that markets are rational. It is not my experience." - Robert Shiller
Events of the Day
March 27, 2002 - Passover (1st day)
March 29, 2002 - Good Friday
March 31, 2002 - Easter - NCAA women's basketball championship
April 01, 2002 - April Fool's Day - NCAA men's basketball championship
April 07, 2002 - Daylight Saving Time begins (US)
April 08, 2002 - Pulitzer Prizes announced
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