Earlier this month, we asked Wall Street’s luminaries for the most important charts of the year.
Jack Bogle’s chart was elegant in its simplicity. It was the price-earnings ratio.
“When P/E ratios are historically low, (say, below 12 times) they have been highly likely (84 per cent probability) to rise over the subsequent decade,” he said. “When they are historically high, (say, above 20 times) they have been highly likely to decline (87 per cent probability), though in neither case did we know when the change was coming. Certainty about the future never exists, nor are probabilities always borne out. But P/E ratios are useful as a basis for reasonable expectations for the future.”
Recently, rebounding P/E ratios have been causing stocks to rise even as earnings expectations have fallen. This has got to be driving the bears crazy.
Photo: Business Insider