P/E vs S&P 500 (50 Years)

Take a look at this great chart of P/E versus the S&P 500.  It does a wonderful job of setting up the valuation question.  You can see what is wrong with it, even without looking for a better model.  The trailing P/E ratio method is poor both descriptively and prescriptivey — the two reasons we look for relationships.  It is exciting in that it explains why the parade of talking heads have been saying for years that the market is overvalued, and lets you judge the wisdom of their statement.

Take a look at the chart, courtesy of Mike Panzner via Barry Ritholtz, and then we’ll analyze it more carefully.

Link: P/E vs S&P 500 (50 Years).

As promised, today brings us to the 4th in our series of charts: P/E vs SP500click for larger chart courtesy of Mike Panzner, Rabo Securities I’ll get into the significance of what this means to the markets later, but for now, note where the P/E is over …

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Themes from 2005 — Dick Green of Briefing.com

Dick Green, President of Briefing.com, is an award-winning writer, picked this year by Smart Money as one of the top 30 market movers.

His Summary of 2005 highlights some key themes, and he then offers lessons from each.  (You might need a subscription for some articles, but you can find many of them here).

Dick draws some lessons from each theme.  I agree with the 2005 summary, and my own market outlook will also build on the 2005 events.

Here are the themes:

1) The U.S. economy proved extremely resilient to exogenous shocks.

2) Earnings growth was very strong and corporate balance sheets shined.

3) Value returned to the overall stock market despite rising interest rates.

4) Inflation remained surprisingly constrained.

5) Pervasive pessimism persisted throughout the year.

Dick (like me, Chicago-based) sees misplaced fears and pessimism, especially from "journalists based in the slow-growth Northeast.  He warns investors not to get caught up in the fashion of the moment or specific data points.

It is great advice.

Don’t Fret the Inverted Yield Curve

For those interested in the complete text of the David Malpass report I mentioned yesterday, you can find it here, along with a lot of other good reading in the section on markets.

Link: Don’t Fret the Inverted Yield Curve.

David is one of the world’s best economists. Following by David Malpass, Cheif Economist, Bear Stearns. Equities weakened on Tuesday and bond yields fell further, pushing longer-term yields below shorter-term yields. We disagree with the view that …