I recently had the opportunity to hear Ed Easterling, founder of http://www.crestmontresearch.com speak about his latest book, ‘Probable Outcomes, Secular Stock Market Insights.’
Easterling made a compeling argument that Secular Bull Markets do not begin with high Price Earnings Ratios (P/E Ratio). As I recently tweeted, “Rich Valuations, Poor Market Returns, S&P 500 Shiller P/E in Excess of 24 times earnings, one can see that the markets are fully valued right now.
Let’s get a few definitions out of the way to start with; Easterling explains,
“The long-term view of the stock market reflects extended periods of surge and stall. These periods, known as secular bull markets and secular bear markets are not optical illusions; rather they are extended periods when market valuations (i.e. price/earnings ratios: P/Es) are either multiplying the effect of rising earnings or mitigating them. Secular bull market periods have always started when P/Es were below average, and secular bear markets have never ended when P/Es were above average.” (Thanks for that good news Ed)
Guess what? Current P/E ratios are well above historical norms, roughly 22X to 24X earnings. The chart below shows us that secular bull markets typically begin when P/E ratios are close to single digits and certainly do not begin above the historical average of 15 times earnings.
Conclusion
The mighty fall from Dow 14,000 in October 2007 to 6,500 March 2009 only ‘produced’ a P/E ratio of 15 times earnings. Does the market have further to fall before we can begin a new secular bull market?
This is something the markets must decide, no bull!
