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Fun with Charts. P/e ratios and the S&P 500.

Posted By on November 16, 2008

I’ve been following what’s been going on in the financial markets, and although this is off-topic, I thought I’d post it anyway.

P/e ratios, 1880-2008, S&P 500

P/e ratios, 1880-2008, S&P 500

In a post on Econbrowser, James Hamilton argues that the chart above – which shows that p/e ratios on the S&P 500 have declined to slightly below their longterm average – indicates that shareholders who buy now should expect “slightly above-average” returns.  He says the silver lining of the recent market declines is that they allow investors to get more shares for their money.

While that’s certainly true, I have a hard time feeling optimistic based on what the chart seems to say.

What it seems to say is that each of the bear markets of the 20th century lasted about 20 years, and that each time p/e ratios fell to between 5 and 7 before recovering.  If history is a guide to the future (and I don’t know that it is) we have a lot further to fall (50%+), and another decade or so before we see a sustained recovery.


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