08 Jan
Is the Stock Market Cheap?
by Mike Shedlock
For the last two months, we have heard round after round of bottom calls and a consistent message of “stocks are cheap.” Some make the claim based on a comparison to treasuries. The reality is it makes no sense to compare stocks to treasuries.
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Think the stock market is cheap? Let’s do the math. The S&P closed at 910. If those earnings estimates hold, the effective PE is 21.53. The historical average PE is about 15. At a PE of 15 the S&P would drop to 634. That is a huge drop of 30% from today’s closing price.
What happens if the stock market over shoots as it typically does in bear markets? Assume a PE of 12. At 12, one might expect to see the S&P at 507. That would be an even bigger decline of 44% from here.
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