A sustainable bull market?
Stocks have been shooting up for 8 weeks in a row so far, and quite a lot. I am asking myself if I am one of the few dulls that staid on the sidelines looking at the beginning of a secular bull market, missing out on bargain prices that we won’t see for decades, or maybe never again. Have I been too risk-adverse? Have I missed something that was so crystal clear to the many smart enough to be long all the way up?
Despite markets keeping on rallying, I am still convinced I’d better stay put for another while - that is, at least till past summer.
As my recent investment decisions have been made on broader economic analysis, I thought I’d better check out where is the market right now compared to them, and with particular attention to corporate earnings. I wanted to check whether the recent bottom was at a such depressed level that could have sparkled a sustainable long term bull market.
My working assumption is that this is one of the worst crisis ever, comparable to the great depression. If this working assumption holds true, then you’ve gotta see very cheap stocks at the bottom of the market. Have we seen such discounted stocks?
I looked online and found the below chart, courtesy of Mr Shiller (yes, that Shiller, friend to Case). I would assume the source good enough to trust what I see.
S&P PE ratio
This is what I see: current S&P P/E ration is just above 15. Looks cheap. Is it really cheap? Let’s look a while back and we see it has been down to 5 in the early 20’s and 30’s. then below 10 in the 40’s, 50’s and 80’s. 15 seems pretty much close to the long term P/E average. Can’t be possibly considered cheap enough to mark the bottom of one of the most devastating recession man has witnessed, can it? Also, it was around 22.5 just after the dot com bust, which was a pretty contained event without much harm to banks, governments and the broader economy. This doesn’t sound right to me.
On top of this, add the fact that Q1 earnings in financials could be considered -well, let’s say- dubious (thinking to gosth months, depreciation of liabilities turned into profits, creative marking to market).
In all fairness, I can’t possibly believe that a recession that caused the financial system to collapse (now on governmental life support), GDP to shrink 6% two quarters running, 8.5% unemployment, foreclosures in hundreds of thousands, tent camps to develop in US big cities suburbs, G7, G8, G20 to gather together with an oath to save the world from global collapse will manage to just take the PE ratio down to historical averages, or slightly below them.
I happily stay out of the market waiting for better prices. I am convinced we will see lower lows for the Dow Jones, S &P, and the Nasdaq as well. Maybe P/E below 10 is not far away.
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