RUT didn’t have a bubble peak the way other indices did, so it didn’t have to fall as far after 2000. The return since the mid 80′s is now about the same on the RUT and the DJI.

The Russell 2000 has long exceeded its 2000 market highs. In any sustainable rally, small caps lead the way. The Dow will now play catch up with both cash as well as against the Rut 2000 index. This mean the cyclical bull market that began in March 2003 has a lot of life and legs left!

Assuming that earnings are stagnant, then a stock becomes like a bond and the dividend yield actually becomes the most important cash flow component. That is currently 2 %. But stocks are risky so a person has to add a “premium” to the risk free bond price. Since short term money is returning 5 % plus the historical 3% risk premium for the bluest of blue chip stocks, a non-risk averse investor should expect at least 8 % from stocks. In a world of stagnant earnings this would equate to a 75 % drop in stock prices.

Since earnings have historically averaged the same as the growth in GDP more or less on average, earnings growth is likely to retrench to below earnings growth as a cooling down occurs. For me, that increases the risk premium. In a risk averse world, which means anyone that wants to keep their money, I peg the reasonable P/E at 10 – 11. If I want income, I’ll go with short term treasuries.

The US is sitting on top of a huge bubble tha will turn into 1970′s inflation (by some accounts, if measured properly, allready has). Any rise in economic activity will translate into inflation. The Q2 GDP which was revised downward after being revised upward smelled the joint up with inventory accumulation and government spending.

I figure the market has a 40 – 50 % fall to be fairly valued again.

Your PE “conundrum” is solved by John Hussman’s peak earnings PE ratio concept. Takes out that nasty confusion caused by apparent PE expansion in recessionary periods. It’s at his site in one of his research articles and I think it was in Barron’s at one point.

Say if earnings dropped 50 pct, which happens all the time in recessions, then P/E’s are at 38 X earnings. Or when earnings are negative, what is the P/E then ?

Dividends are also very low by historical measures. By the way GE has gained about $ 2 per share over the past three years.

The period 1966 to 1982 is a very good example of what may happen to stocks over the next ten years. I think the DJIA in 1982 was the same as the DJIA in 1968. A liquidity driven 1960′s boom turned into the 1970′s bust. Asset price inflation turned into financial price inflation and everything stagnated for 12 long years.

Japan is just now stabilizing from the asset price inflationary bust of the late 1980′s.

The Fed is continuing their intransigence against inflation, hoping it will just go away. It isn’t. Oil prices go up, the Fed says oil prices don’t matter. Oil prices go down, the Fed says inflation is over. That is one confused and F—ed up group. Painting the numbers like hedge fund managers have been painting the tape. Makes me wonder to what end?

I think that is why there is rotation into these stocks. Better to hide in low PEs than the other way around. But I still don’t think they are cheap. Maybe fairly valued but not cheap. I am with “bob” on that point.

I don’t need to own stocks. I can be in or out. Right now I am mostly out. My cash is earning 4.9% short term and risk free. If I extended it a littlle (6 mos) it would be even better.

When the index crosses (matches) its previous high, I would expect 50% to be higher and 50% lower than at the previous index high. (disregarding changes to the index/survivorship bias)

However I would expect only a small number to be making their own new all-time highs. (Mathematically, you don’t need any to be at new highs – each individual stock could have been higher at some point in the past when the other 29 stocks were on average lower)

So the fact that we are only -9% negatinve in our investments is not so bad. We will see much deeper levels in coming years. Much deeper.