Bob Bronson (BRONSON CAPITAL MARKETS RESEARCH) looks at the long term P/E cycle:

Bob Bronson notes Supercycle Bear Market bottoms have little to do with current P/E ratios. Financial theory and 138 years of history covered in our P/E Predictor Study I demonstrates their only predictive value is if earnings in the denominator are properly averaged over a multi-year period and the results are used to predict stock market prices over the next 10 to 20 years.

It makes no difference if operating earnings or income tax-based NIPA earnings are used instead of “as reported” GAAP earnings, and it makes no difference if exact future earnings are used instead of trailing earnings. Of course, the coming stock market low can be divided by some form of earnings measured over the past or even future four quarters to get a P/E ratio, but it will have no meaningful predictive value for the stock market over the following quarter, year or even over many years. Both history and financial theory support this assertion. The stock market has had a large range of both positive and negative performances for the same such calculated P/E ratio.

>

Category: BP Cafe, Earnings, Investing, Technical Analysis, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

8 Responses to “Bear Market Bottoms & P/E Ratios”

  1. Chief Tomahawk says:

    Looks like the negative buttons on Jim Cramer’s soundboard will be getting a workout if these charts hold true.

  2. ironman says:

    Of course, the coming stock market low can be divided by some form of earnings measured over the past or even future four quarters to get a P/E ratio, but it will have no meaningful predictive value for the stock market over the following quarter, year or even over many years.

    Earnings are the wrong measure. If you want to know where stock prices are going in the near term, use the acceleration rate of dividends. You can work out how much prices will change, but “when” and “from what base” are the questions that you’ll need to answer.

  3. tom brakke says:

    Having just posted about getting back to normal, it was interesting to see these charts, which look like the crude one I included as an example.

    One key thing (especially at a time like this) is to think about what relationships may no longer be valid. While these long-term charts provide important perspective for decision making, we still need to be wary about whether our expectations are properly set by them.

  4. DL says:

    Note the big upswing in P/E during WWII.

    The government’s actions may produce that result again… perhaps during 2010-2012.

  5. tom brakke says:

    Sorry to anyone who has attempted to follow my link above and found it not working. My webhosting firm picked today to have a massive outage.

  6. leftback says:

    Thanks for the reminder, Barry, that P/E = 8 is never far from my thoughts these days.

  7. Expat says:

    The major problem with all the predictions, charts, formulas, and other market voodoo being applied is that they are based on the past ten or twenty years.

    On one hand, we have journalists, analysts, and economists who tell us quite clearly that we have been living through the greatest credit bubble in history, bringing with it inflated asset prices and earnings. They tell us that the Great American Consumer must reduce his consumption and start saving, leading to signfigantly lower levels of economic activity and, consequently, earnings. Additionally, assets are still being written down, leading to continued losses.

    Then cheerfully, with a bit of sleight of hand, they tell us that stocks are under-valued because P/E ratios are lower than they were for the past ten or twenty years based on either trailing earnings or projected earnings (which are being based on trailing earnings anyway).

    The dishonesty and Pollyanna, wishful thinking are disgusting.

    While we would all prefer a world where we are magically rich, healthy, and happy, it is preferable to at least know the truth: we are going to be poor, unwell, and miserable for a while.

  8. hejpfund says:

    “The stock market has had a large range of both positive and negative performances for the same such calculated P/E ratio.”

    The same can be said for any single measure of the stock market, fundamental or technical.