Wednesday, August 15, 2007
David Leonhardt Says Stocks are Expensive
The standard measure of the market is the price-to-earnings ratio. Right now, the stocks in the Standard & Poor’s 500-stock index have an average P/E ratio of about 16.5, which by historical standards is quite normal. But a harder view is that P/E ratios should not be based on only one year’s worth of earnings. The Graham-Dodd approach produces a very different picture from the one that Wall Street has been offering. Based on average profits over the last 10 years, the P/E ratio has been hovering around 27 recently. That’s higher than it has been at any other point over the last 130 years, save the great bubbles of the 1920s and the 1990s. The stock run-up of the 1990s was so big, in other words, that the market may still not have fully worked it off. This from an article of D. Leonhardt in NYT. Conclusion: No one knows a shit.