Wikinvest Wire

Are stocks expensive?

Tuesday, March 09, 2010

For some reason, an important graphic was left out of the online version of this story in today's Wall Street Journal and it seemed like a good idea to reproduce it here from the print edition in an attempt to better understand the questions that David Wessel asks about whether stocks are cheap or expensive today, on the one-year anniversary of the low last March and a full ten years after the Nasdaq reached its all-time high back in 2000.

Anyone looking closely at this chart from Yale economist Robert Shiller would say that, at this point, stocks are a bit pricey. In fact, what's remarkable about the data below is just how expensive shares were a year ago when people talked of generational lows in valuations. As it turns out, early-2009 was the only period since 1991 when stocks were below the long-run historical average when calculated as Shiller has done.
IMAGE While some would surely argue that we've reached a permanently high plateau for valuations since the 1980s, higher prices may have much more to do with how radically different the financial world is today than it was in the century before the 1980s.

With seemingly no limit on how much money and credit can be created and pushed into the system to make all sorts of asset prices levitate, is it reasonable to think that we'll ever see a secular bear market bottom like the ones in 1982 and prior?

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Apricot said...

Looking at the chart, my first comment would be"What's the distribution about the Average (Shiller PE)?" If it's not a Normal Distribution, then the median and deciles might be more relevant for comparisons.

Has anybody done the relevant analysis?

Anonymous said...

A world pre 1971 mostly fixed to gold in one form or other and post 1971 fixed to the probity or otherwise of US Presidents, politicians, and Wall Street banksters occupying th great financial offices of state.

Anonymous said...

The bear market low in 82 was brought about by steadily rising inflation, and the attempt to tame it. That's when the bank found out that they could only steal so much from consumers before consumers tried to protect themselves. The wage/price spiral that resulted created stagflation, and the DOW lost 2/3 of its CPI adj purchasing power from 1966 to 1982.

After that the bank contented itself with stealing the productivity increase. Workers complained when they could buy less, but didn't complain when they couldn't buy more over time. The bank then proceeded to confiscate the entire productivity gain for decades, and loaned the loot back to its victims. Debt built up to historic levels, and the rest is history.

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