P/E

What Has Been The Best Inflationary Environment For Stock Market Performance?...How Have Stocks Done In Deflationary Years?...121 Years Of History Examined...Also Looks At P/E Ratios In Different Inflationary Environments

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When value investing requires so much effort just to locate purchase candidates, you might want to re-evaluate your equity sector asset allocation strategy if you have that option. What do the growth stocks look like?

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Does historical data suggest that a big performance decade is followed by a poor relative performance decade? Or, does a big performance decade beget an extended period of above average performance?

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During November, a California client brought up an interesting point relating to P/E valuations and to our historical studies of stock market P/E ratios. “How would today's typical P/E compare with the typical P/E of the past?”

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Secondary stock measures were up 7%-9% in November compared to 5%-6% for the capitalization weighted measures. All we can say is, it’s about time!

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The two most common questions we hear from equity only managers are: “When (if ever) should we start buying secondary stocks?” and “When do you expect a market leadership shift to the cyclicals?”

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Making relative value judgements for cyclicals on a P/E basis can be tricky. These stocks often look the cheapest when they should be sold and look the most expensive when they should be bought.

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In 1988, corporate profits have been surging ahead, but the stock market has paid little heed. Investor psychology is still negative. Good earnings reports are greeted with a sell off more often than a rally.

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Compared to low P/E institutional stocks, the high P/E institutional stocks are very cheap in terms of relative P/E’s. But don’t get too bullish yet. There is more to the story.

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The NASDAQ Index and the Value Line Index outperformed the DJIA in January and about matched S&P 500 performance.

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Historically, small cap stocks have outperformed big cap stocks in about two out of three years. But this has not been the case since mid-1983. What is going on? Has the investment world changed? Will small stocks ever again lead the parade?

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Historically, have tax cuts been a stock market positive? Have tax increases been a negative? What impact do changes in the tax rate have on prevailing market P/E multiples? The answers to these questions may surprise some of our readers.

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Over the past 57 years, what kind of future performance did the investor experience when the market was at 10 times earnings? 15 times earnings? 20 times earnings? Based on this work, over the next five years total stock market returns should not be expected to exceed 6% per year.

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This may put today’s stock market in better perspective. Quarterly P/E’s based on normalized earnings are presented over a 57-year period, broken down by deciles and also presented in graphic form.

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While blue chip growth stocks look cheap relative to low P/E stocks, they don’t look so cheap compared to recent earnings growth rates.

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High P/E Quality stocks are now very cheap on a relative basis, at least when compared to low P/E stocks. Unfortunately, our timing work does not yet show favorable market momentum developing for these issues.

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