Valuation Issues

December 30, 2005

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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