Thursday, October 09, 2008

Human lemmings

Paul Krugman on a possible reason for the stock market sell-off:
I’m sure we’ll be hearing all kinds of explanations of today’s drop... But you want to remember Robert Shiller’s classic real-time study of the 1987 crash. Basically, the crash had nothing to do with any news item. Investors sold because — drum roll! — prices were falling.
The price-to-earnings ratio for the S&P 500 is now 11.6, compared to an historical average of about 14. In the dozen years I've been investing, the S&P 500's P/E ratio has never been that low. (Damn bubbles!) As A Random Walk Down Wall Street points out, on average, the lower the market P/E ratio, the greater the future stock market returns over the long haul.

Here is Morningstar's market valuation graph:

Update: According to Yahoo! Finance, the P/E for the S&P 500 is 13.5, not 11.6.


  1. S&P 500 P/E will drop to around 10. Then earnings readjustments will increase the P/E to 15 while prices remain flat. Yes I am expecting about a 35% decrease in earnings across the board. Still at 15, that is a bargain when you compare it to the historic average of 14. I plan on buying again at P/E of around 10.5. Also be wary of inflation in the next 6 months due to massive amount of $ injection into banking system. Hedge with positions in gold and silver such as precious metal funds.

    Tony (who usually posts on here)

  2. Just as it can create a bubble, it's no surprise that herd mentality can exacerbate a market slide.

  3. WE have been chatting on values..etc.. the consensus was in the early 1980s..single digit PEs...below book value..dividend yields high...this is what we expect.. are we wrong..let us know