The stock markets overall P/E ratio (Price of shares divided by earnings per share) averages 15-16 over the last 30-40 year period. Today the 12-month P/E forward looking is now just below 14 now that the stock market has declined about 17%. Some articles say that is cheap. Is it? Answer: "It depends". Real answer: "Who cares".
This period includes the highly inflationary late 70's and early 80's. When inflation was double-digit, the P/E on stocks was below 10 (in some years 8, yes, 8 in the 80's). If you remove those high inflation years, the P/E hovers more in the 18 range. That would lead me to believe that a P/E of 14 is about 20% (that is, 18-14 = 4; then 4 divide by 18) lower than the average. Maybe 30% if you use 20 as an average assuming we don't hit another period of double-digit inflation. If we do, then the current 14 is even too high, too, meaning stocks are still expensive.
So, yes, stocks may be cheap based on current inflationary trends. Maybe not. Even if inflation is 4-5%, that is way below the double-digit % that it was 25 years ago. Many, including me, believe inflation is much higher than the rates being stated these days (read my other labels on the economy-inflation for that) but, even so, they are not double-digit rates. But who knows where we are headed? I am not a market-timer. It does not work. If Nobel-winning economists cannot figure it out, then why do you think the local money manager (i.e. financial advisor, planner, consultant, whatever) can?
So the real answer is "Who cares". Why? Because you should not invest in the stock market thinking it is cheap now based on low P/E's or not. You invest because, long-term (10+ years), the stock market returns have a good chance of exceeding inflation and helping you meet your goals.
An Introduction
Hi. Welcome to BourGroup and my blog. Phil
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.