On this blog, I have never given investment advice and never will. I have never made recommendations to time the stock market for good reasons as the stock market is irrational. What I have tried to do with this blog is educate and advise business leaders to help them understand what is currently happening in the marketplace and then how to plan their next move. Most accountants are good at telling you where your business has been (historical reporting), but few are good at helping you steer your business by looking forward. I want to help you take advantage of opportunities and steer clear of pitfalls. It is with that context that I share the following information.
Historically the S&P 500 has traded in a range of around 10 to 20 times price to earnings ratio. At times this price range has been higher (dot com bubble…), but it almost always returns to a more normal ratio. Since the low point of March, the S&P 500 has gained over 50%. What caused this rally? Is it based on corporate profits? No, as most reported a loss in the 2nd quarter. So what drove the market up? Part of the rally is based on a huge infusion of government stimulus money and part is the expectation that we have hit the bottom and better corporate profits are just around the corner. This could all be true and I hope it is as I have been accused of being a bit of a Johnny Raincloud. Here is a chart which shows the historical price earnings ratio of the S&P 500 during the past 70 years and it shows the current ratio at 129 times 2nd quarter reported earnings:
Many are saying this is a different stock market and that it went down too far too fast and therefore, the recovery is warranted as this recession is hitting the bottom. They point to the expectation of higher profits in the coming quarters. This stock market has clearly factored in these expected higher profits.
I still struggle to see a broad reaching recovery when we have extremely high unemployment and we have a huge problem with commercial real estate. This commercial real estate problem is starting to hit as we have had 81 banks fail this calendar year already. I will let each of you decide what you expect to happen in the next few quarters. I will try and continue to review the fundamentals and help you navigate.
81 failed banks is something to raise your brows at. If this continues the commercial real estate is going to hurt as bad as the home mortgage failures.
Posted by: KJ Rodgers | August 25, 2009 at 01:57 PM
I recently came across your blog and have been reading along. I thought I would leave my firstcomment. I don’t know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.
Posted by: Money Stock | August 03, 2010 at 03:44 PM