Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

P/E Scenarios for a Volatile Time


Removing the mystery of valuation levels.

Back on August 28th, I provided a table that listed various economic outcomes using simple, yet direct terms, such as "average times", "great times" and "terrible times." Accompanying each economic outcome was a P/E ratio and earnings outlook that, when multiplied with each other, produced a valuation level for the S&P 500.

I am now providing an updated and evolved version of that data that should help investors frame the current economic and market environment.

Below is a simple Excel chart that uses a probability approach. Last Friday's data shows a market that was significantly undervalued (return potential of +17.90%). The economic scenarios are listed in simplistic terms with the corresponding P/Es that typify the times.

Look at the interplay between the P/E ratios for each economic scenario and the 12- month ahead operating earnings for the S&P 500. Note that different conditions require different inputs, most markedly in the terrible times scenarios.

Click here to enlarge.

Investment Strategy Implications

You might argue with the inputs; but, what can't be disputed is the process – one that any investor can construct and use to great effectiveness. According to my work (expressed in the above table), a conservative valuation level for the S&P 500 in the current market climate should be no less than 1033.94. This number will rise and fall as the data from the economy and other factors come into play and the probabilities and earnings are accordingly adjusted.

By creating this kind of spreadsheet, any investor can remove the mystery of valuation levels for the overall market, provided they can get the inputs correct. And that's the real hard part of this game we call investing.
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos