“Investors need to understand the long-term trends in stock valuations,” writes Dan Amoss. Starting valuation is crucial to your investing results. Overpaying for stocks near the peak of bull markets is a surefire way to lose money.
“One of the best methods of stock market valuation is based on the work of Yale professor Robert Shiller and his now-famous “Shiller P/E ratio.” The Shiller P/E ratio is calculated as follows: Divide the S&P 500 by the average inflation-adjusted earnings from the previous 10 years. Here is a chart of the Shiller P/E going all the way back to 1880:
“This is the best P/E ratio to use over long stretches of history, because it smoothes out the extreme peaks and valleys in earnings, giving a better framework for thinking about future S&P earnings power. The mean and median Shiller P/E since 1880 are both about 16. Today, it’s about 22. At the last four major bear market bottoms, in 1921, 1932, 1949 and 1982, the Shiller P/E fell all the way into the range of 5-10. This is a far cry from bouncing sharply off of 15 — which we saw at the March 2009 bottom.
“Valuation is the main reason why I expect the bear market to last several more years into the future — probably somewhere in the 2015-2020 time frame. I think we’ll get there through some combination of falling stock prices and modest earnings growth. Rising Treasury yields should drive stock valuations lower.”
If you’re worried about the next market correction, Dan’s your man. His Strategic Short Report readers are well prepared for the next leg down. Join his ranks HERE — for a limited time — for just $1.
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