The U.S. stock market has been significantly overvalued for most of the past two decades, with the exception of a brief moment at the worst of the financial crisis three years ago.
That is to say, the U.S. market’s P/E on a cyclically adjusted basis–using “normalized” earnings instead of the earnings produced by abnormally high or low profit margins–has been decidedly above average.
And, by this measure, the US market remains significantly overvalued today, with a PE of 22X versus the long-term average of 16X (See chart from professor Robert Shiller below).
Photo: Professor Robert Shiller
Given the length of time the market has been overvalued, investors can be forgiven for thinking that “this time is different” and that the market will always be overvalued. And that may be right.
But for those who have been waiting two decades for a truly “cheap” market (and missed the one in March of 2009), there’s at least one stock market on the planet that’s getting there.
As Spain becomes more and more of a train wreck, it’s stock market gets cheaper and cheaper.
According to this chart passed around by Reuters’ Scott Barber (@scottybarber) and BI’s Joe Weisenthal (@TheStalwart) this morning, Spain’s market is now down more than 60% from its high and is trading at about 8X this year’s projected earnings.
Photo: Scott Barber, Reuters
That’s not absolutely rock-bottom pricing–markets do occasionally go lower–but it’s cheap.
So maybe this time isn’t different.