Stocks Back To Fair Value!

Well, you had an opportunity there for a couple of months to buy stocks when they’re cheap.  Now they aren’t.  But they aren’t expensive, either, at least not on our favourite market valuation measure, the long-term cyclically-adjusted PE ratio.

(What’s a cyclically adjusted PE ratio?  It’s a measure that smooths out the effect of the business cycle on corporate profit margins, thus providing a more stable view of where stocks are trading relative to long-term corporate earnings power.  If you use a single-year PE ratio at an extreme of the cycle, you’ll get a misleading view of the market’s value.  At cycle lows, like now, stocks look artificially expensive.  At cycle peaks, like 2007, they look artificially cheap.  The cyclically adjusted PE smooths that all out.)

Professor Robert Shiller, the dean of the cyclically adjusted PE, maintains long-term data on this measure, which he updates every month.  The market’s PE right now is about 16X, smack-dab in line with its 130-year average.  This suggests that stocks are priced to return about 7%-9% per year for the next decade.

See Also: Grantham Now A Snorting Bull, Stocks Going To Moon


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