On Wednesday, we highlighted how the only other period where the S&P 500 had a weaker performance following the end of a recession was in 1970. We also began a series of posts which highlight how this recovery stacks up against other recoveries based on a variety of economic and market indicators. Today we continue the series with a look at two more indicators- corporate profits and PE ratios.
The chart below shows that of the seven recoveries since 1962, corporate profits have risen at a faster pace than any other recovery since 1962. Clearly investors should be bullish, right?
One way to guage investor optimism is to look at the market’s PE ratio during each period. While there can certainly be other factors at work, generally speaking, high P/E ratios indicate that investors are willing to pay more for every dollar of earnings (optimistic), and low P/E ratios indicate the investors won’t pay up for earnings (pessimistic). As shown in the chart below, investors must have gotten up on the wrong side of the bed at the start of this recovery, and have been in a sour mood ever since. Since November 2001, the P/E ratio on the S&P 500 has not only grown at a slower pace than any other expansion, but it has actually declined!
One of the best graphics I've seen in ten years
Posted by: One Wway Stox | April 28, 2006 at 08:12 PM
Weak dollar, asset-based inflationary cycle. History does repeat itself. Only question is if we will continue to see inflationary pressures or whether we are now going to experience deflationary pressures with the idiots driving hard assets to 100 year highs in some instances. PE has a realistic chance of getting to 7-12 before it's all said and done. This cycle or next cycle will was out and provide a tremendous buying opportunity.
Posted by: x | April 29, 2006 at 10:01 AM
PE compression, as earnings rise is a rare event. There have been 8 two-year periods where earnings rose and PE's fell since 1955. The average return in the subsequent 3rd year is 24.7%.
Another similarity to the '94-'95 scenario...history rhymes.
Posted by: SS | May 01, 2006 at 10:34 AM
If you want history to rhyme, you had better look beyond a statistic without other supporting information. The PE expansion or price to book or price to sales has occured this cycle in many asset classes. Homebuilders, metals, small caps, broker/dealers, transports, commodities.
Some of these are at valuation levels not seen in ten to fifteen years. A rising tide lifts all boats. So, we are going to see another 25% increase in PE expansion at this phase of the cycle while the Fed is still raisng rates? That would also expand other equities that are at the peak end of valuation metrics. Uh, I don't think history supports your case. You can't do single variable analysis and come up with high probability scenarios.
May happen but a multivariable analysis does not support your conclusion. And quit stealing Mark Twain's quotes! :)
Posted by: x | May 01, 2006 at 10:43 AM
Please re-read my post. PE COMPRESSION (not expansion) coupled with rising earnings have "predicted" higher markets, and is a rare event. The past two years have given this signal again. You can choose to ignore this statictic, or look to see if other similarities exist between these periods. "95-'95 have similar characteristics. Did you get many chances to buy pullbacks in '96? Equities (by definition of compressed PE's) are NOT at "peak end of valuations".
Good luck.
Posted by: SS | May 01, 2006 at 11:37 AM
I did read your post. I understand fully what you are saying. You are missing my point. You believe the S&P PE will expand because it has contracted for two years. I'm saying you are looking at the wrong index. The S&P's PE did not expand and has not expanded this cycle. It has been other indices. They are now at extreme levels of valuation and do not support your argument for an S&P PE expansion. Nor does a multi-variable analysis of the surrounding economic and alternative asset class investment choices.
Posted by: x | May 01, 2006 at 12:04 PM
Well, data mining is an art. We can agree to disagree...so by all means take the other side of my trade.
8 for 8 since '55 gives me confidence in my long position.
Again, good luck.
Posted by: SS | May 01, 2006 at 01:34 PM
lol! Nothing like a healthy debate. I don't like anyone to lose money so I wish you luck. But, I will say single variable statistics and data mining is a paradox. Btw, we are at the height of peak earnings over the last fifty years. There is no precedence for earnings as a percent of GDP to expand even further. That's 50 for 50. Pretty good statistics there too.
Posted by: x | May 01, 2006 at 04:52 PM
SS and X,
Thanks a lot for the great back and forth. I enjoyed reading it. We'll have some more charts tomorrow.
Paul
Posted by: Paul Hickey | May 01, 2006 at 08:34 PM
Get your butt in here Paul so we can hammer on you a little bit. :)
Posted by: x | May 02, 2006 at 10:38 AM
Maria B had lunch with God today, and will be reporting his opinion on this debate right before the close....Straddle time! ;o)
Posted by: SS | May 02, 2006 at 11:47 AM
Did anyone actually think the Fed Chairman was going to say, "Yes Maria, the market got it right. The Fed is done raising rates."
Posted by: Paul Hickey | May 02, 2006 at 11:50 AM
I think Maria is a little bit of a sycophant. She's come on before with her little tid bits of ass kissing reports. She can't be having lunch with God today because he's on my calendar. LOL!
There is as reasonable a chance that she misinterpreted his comments as the market originally misinterpreted Bernanke's comments. And, as you state Paul, what the hell is is going to tell her? I mean really? CNBC needs a competitor. Can we get ROBtv from Canada into the US market? Get Mr. Deep Pockets, Laszlo, to fund us.
I think Maria needs to focus more on winning me over for a date and less time proselytizing Fed policy.
Posted by: x | May 02, 2006 at 02:20 PM
Isn't the PE ratio coming off the highest in history (1999 - 2000)?
Posted by: | May 09, 2006 at 12:46 AM
Where do you get you P/E historic data from? Is there a place where I can get it for free?
Thanks
Posted by: | May 11, 2006 at 11:46 AM