The Stock Market is About Where It Should Be

I’ve said it before and I’ll say it again (because it’s true) dropping stock prices are a good thing. Crashing stock markets are a great thing. And the reason why is unless you are retiring tomorrow, you’ll be able to pick up stocks all that much cheaper. Instead of paying $100 for a share of IBM you’re paying $40. Instead of $200 for Merck, you’re paying $125. Ergo why, especially the younger generations, should be cheering for a collapse in the stock market.

But what is interesting is trying to find out precisely when the market will bottom out. When is the “ultimate” or “ideal” time to buy. I know many people have been saying, “Hey, now’s the time, it doesn’t get any better than this” but allow me to pour a little more rain on the parade.

Based on P/E ratios furnished by Dr. Shiller at Yale, the S&P 500 as of August was still trading above its historical P/E average of 16 (the red line), trading roughly around a P/E of 20. Now this does not include the 25% drop in the S&P 500 that has occurred since August. Even adjusting for that (and assuming earnings don’t tank further), the stock markets are at best…

Accurately valued.

Sorry to tell all you people that, but right here is where the markets are in line with their historical valuations. The Dow Jones at 9,500 and the S&P 500 at around 1,000 is where things should roughly be. This is “correct.” This is “about right.”

Ergo, you should not be loading up on stocks now, because you’d be paying the historically average price of a stock which is $16 in stock price for each $1 in earnings. You’re not getting a deal, you’re paying retail. People should wait for the market to REALLY go on sale, and with a recession guaranteed, it’s almost a surety it will. You laugh at Cramer suggesting a 7,700 Dow, just like my big time former employers laughed at me when I said there was a housing bubble (and an Asian currency crisis and a Dotcom Bubble), but you might just want to (for a change) listen.

Post Script - many thanks to Dr. Glenn Reynolds at Instapundit for the link. For those visiting from Instapundit, I would be immeasurably grateful if you could mayhaps suggest to Dr. Reynolds that he take a look at my book so that I may attain my goal of beating Nancy Pelosi in book sales.