![]() ![]() They occurred near a LOW point in the market. The high points in valuations did not occur at tops. ![]() After all, 30 years isn’t exactly a short amount of time.īut more importantly than the actual levels of the P/E ratio is the timing of when this ratio was elevated. After all, the people in charge of the financial media and the large investment corporations learned about stocks and investing when there was no reason to question the validity of this predictable valuation range.īut a closer look suggests this regime shift may not be a temporary phenomenon. We’ve been conditioned to believe that stocks are over-valued if the P/E ratio is over 20 or so. So in actuality it was like much, much higher than 80. Since 1990, it had a low of just below 15 and a high of over 80! Technically, the P/E ratio was not able to be calculated, because earnings were negative in the first quarter of 2009. During the early and mid-90’s, things started to shift higher. (Data was extrapolated prior to the S&P 500 inception in 1957.)įor over 100 years, P/E ratios oscillated between very predictable levels of 8 to 23. The chart below shows the trailing 12-month P/E ratio for the S&P 500 since the early 1870’s. Valuations appear to have gone through a regime shift higher. A strange thing started to happen in the 1980s and ’90s. ![]() With a reading this high, you would assume that the market should be on the cusp of a large decline, right?īut a closer look shows something different. So if the price of the S&P is 3000, and the earnings are 100, the P/E ratio is 30.įor over a century, this ratio oscillated between a low of 8 and a high of roughly 23. This simply calculates the Price of the S&P 500 per share (P) and divides it by the total earnings per share over the past 12 months (E). The most common valuation metric to analyze is the P/E ratio. By all historical standards, valuations are elevated. One of the least debated aspect of the stock market today is whether stocks are overvalued or not. Let’s look at three primary factors in today’s market that could melt the stock market’s wings: Which leads the the obvious question…are financial markets closer to the sun or the sea right now? In order to effectively assess risks, we need to do the same analysis on financial markets as we do with your personal risk tolerances. ![]() How much risk is too much? How much is not enough? How much risk is too much? How much is not enough?. When investing, we are constantly dealing with our inner Icarus. Not only does this myth teach us of the dangers of arrogance, but we could argue that there is also a lesson of the dangers of timidity. This would be a lesson in under-confidence instead of hubris. What if Icarus was too cautious with his wings? What if instead of flying too high and drowning, he simply flew too low? He would end with the same fate of drowning in the sea, but it would provide a much different perspective. Daedalus’ not only warned Icarus to avoid flying too high…he warned him to not fly too close the sea as well. The classic lesson we can learn as investors is “don’t fly too close to the sun.”īut there is another lesson in this story as well. Many people throughout history have suffered from the same flaws that Icarus did so many centuries ago. It’s a tragic story of personal hubris that led to self-destruction. Surely he felt the heat of the sun or the drip of the wax as his wings came apart in flight.īut filled with excitement and over-confidence, he kept his arms flapping as the wax melted off, and soon realized that his feathers were gone. But there must have been other warnings as well. Icarus, like most young adult children, ignored his father’s advice. His father, Daedalus, tested the wings and instructed him to fly neither too close to the sun, nor to the sea. In it, Icarus flies his wings of feathers and wax too close to the sun, and pays the ultimate price when the sun melts the wax and he plummets from the sky and drowns in the sea.īefore his flight, Icarus had warnings. The myth of Icarus we know today has its roots in the classical narrative poem, Metamorphoses, written by Ovid in the year 8 AD. “Well, I think we tried very hard not to be overconfident, because when you get overconfident, that’s when something snaps up and bites you.” If we compared the markets to the flight of Icarus, how close are we to the sun? Close enough to melt our wings? The myth of Icarus warned of the dangers of over-confidence. ![]()
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