When we boil it down, the question on all of our minds is
simple: Can stocks keep going up?
There are any number of variables we can look at when it
comes to evaluating what the market may or may not be able to
do -- unemployment,
consumer confidence,
credit market conditions,
economic projections… the list goes on
and on. But I think the most important variable right now may
be valuation.
As
Berkshire Hathaway 's (NYSE: BRK-A) Warren
Buffett has put it, "Price is what you pay. Value is what you
get." And when I look at the market as a whole, I'm not so
sure that the getting is good right now.
If only it were like the '70s
When it comes to the stock market, history is hardly a
perfect predictor (if it were then
Long Term Capital Managementnever would have imploded),
but it can help us put today's situation in context.
When evaluating the market's valuation, one of my favorite
tools is the dataset that economist Robert Shiller has put
together, which tracks the market's price against
inflation-adjusted average 10-year earnings. The data is
great because not only does it stretch back to the late
1800s, but by using average 10-year earnings, it smoothes
earnings over economic cycles.
The average 10-year earnings multiple for the market over
Shiller's entire dataset is 16.3. Here's a look at valuations
at various points in the past:
Date
Historical Context
Valuation
June 1932
Market bottom during Great Depression.
5.6
September 1932
Peak of post-Depression rally.
9.8
October 1974
Market bottom during 1970s bear market.
8.7
September 1976
Peak of rally after 1970s bottom.
11.8
October 2002
Market bottom during dot-com crash.
22.0
October 2007
Peak prior to current financial crisis.
27.3 Continued... |