Is low P/E of 12, on SP 500 suggestive of slower growth

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Dog_Papa
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Is low P/E of 12, on SP 500 suggestive of slower growth

Post by Dog_Papa » Sun Aug 23, 2009 4:34 pm

Are lower p/e ratios (right now about 12) of VTI & SPY, suggesting slower growth, for the stock market. This is what I learned in business school.

Are high debt loads (no chart to blame, or very commonly economic indicator to attack), one reason for this? I think that's the current situation. Single family homes & other real estate just kept getting more &
more expensive, so people went into more debt, to keep buying them.

Many thought after the dot com bubble, real estate was the place to be,
it was for a while.

It's my contention, mortgages, auto & student loans, are burding our
economic growth. Our economy will begain to recover once these loans
get paid down, and houses & auto are affordable again.

meco1999
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Re: Is low P/E of 12, on SP 500 suggestive of slower growth

Post by meco1999 » Sun Aug 23, 2009 5:02 pm

Dog_Papa wrote:Are lower p/e ratios (right now about 12) of VTI & SPY, suggesting slower growth, for the stock market. This is what I learned in business school.


What business school taught you that? :lol:

Low P/E ratios should mean stock index prices will have faster growth over a time frame of 5-20 years.
Cheers, | meco1999

yobria
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Post by yobria » Sun Aug 23, 2009 5:09 pm

P/E ratios for the S&P are somewhere between 26 and 131 as of Friday according to this article:

http://seekingalpha.com/article/157806- ... s-analysis

Moral: there are a lot of ways to calc P/E, and changes when you mix, for example, current stock prices with historical earnings may not be predictive of anything.

Nick

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bob90245
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Re: Is low P/E of 12, on SP 500 suggestive of slower growth

Post by bob90245 » Sun Aug 23, 2009 5:48 pm

meco1999 wrote:Low P/E ratios should mean stock index prices will have faster growth over a time frame of 5-20 years.

As a general rule, this is correct. Using P/E10 as near-equivalent for P/E, I show the following 20-year chart:

Image
Source and more charts here: http://bobsfiles.home.att.net/OddsAndEn ... #RetVsPE10
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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jeffyscott
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Post by jeffyscott » Sun Aug 23, 2009 7:16 pm

Leaving aside the issue of whether or not P/E is low right now, I'm thinking what he meant was does a lower P/E imply that investors are expecting lower economic growth or lower growth rate of earnings?

If the market price is rational at all times, it would seem to me that it should mean that.
press on, regardless - John C. Bogle

yobria
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Post by yobria » Sun Aug 23, 2009 7:47 pm

jeffyscott wrote:Leaving aside the issue of whether or not P/E is low right now, I'm thinking what he meant was does a lower P/E imply that investors are expecting lower economic growth or lower growth rate of earnings?

If the market price is rational at all times, it would seem to me that it should mean that.


Could be, there's no way to know what's in the minds of investors. If a competing investment, bond yields, for example, becomes more attractive, investors may move away from stocks without any change in earnings.

Looking for P/E patterns, as with most patterns, is probably chasing fools gold, since the complexities that determine stock prices in one era are not likely to repeat.

Nick

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jeffyscott
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Post by jeffyscott » Sun Aug 23, 2009 8:03 pm

yobria wrote:Could be, there's no way to know what's in the minds of investors.


I did say if we have an always rational market, this would mean only rational thoughts about what stocks are worth are in their minds. Competing investment returns would be a valid thought in that mythical world. So I should have said "all else being equal"...

This has nothing to do with patterns, it has only to do with what is a rational price to pay for the expected future stream of earnings. All else being equal, in rational world, investors would pay more the higher the growth rate of earnings is expected to be (and less the higher the returns from competing investments such as bonds are expected to be).

Expected inflation would also, I assume, be another factor that would affect p/e in rational world.

Anyway, I mostly just wanted to clarify what I thought the OP was asking.
press on, regardless - John C. Bogle

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bob90245
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Post by bob90245 » Sun Aug 23, 2009 8:27 pm

jeffyscott wrote:All else being equal, in rational world, investors would pay more the higher the growth rate of earnings is expected to be (and less the higher the returns from competing investments such as bonds are expected to be).

Yes, on an individual stock basis. Growth stocks, who's growth prospects are bright, generally command a higher P/E multiple than Value stocks, who's growth prospects are middling or uncertain.

If the OP believes the P/E multiple of the market as a whole is below historical norm, that likely means that Value stocks dominate the market on a cap-weighted basis.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

yobria
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Post by yobria » Sun Aug 23, 2009 8:59 pm

jeffyscott wrote:
yobria wrote:Could be, there's no way to know what's in the minds of investors.


jeffyscott wrote:I did say if we have an always rational market, this would mean only rational thoughts about what stocks are worth are in their minds. Competing investment returns would be a valid thought in that mythical world. So I should have said "all else being equal"...


Ok, though "all else being equal" takes us into a really abstract world - investors could sell stocks because they simply need to raise capital for an expenditure. That would change the P/E, but again have nothing to do with earnings. In the real world, the only way to know why the P/E of the market changes is to peer into the mind of every investor in the market.

My point about patterns had to do with trying to use P/E to guess when stocks are "undervalued". Since we can't say a) why the P/E changes in the first place, and b) what the future holds, it's "doubly impossible" to infer any free lunches from market P/Es.

Nick

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Post by larryswedroe » Sun Aug 23, 2009 9:03 pm

Markets price risk, not growth.

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Post by bob90245 » Sun Aug 23, 2009 9:45 pm

larryswedroe wrote:Markets price risk, not growth.

Could this be refined that markets price business risk? For example, a Growth stock who's earnings prospects are bright pose lower business risk than a Value stock who's earnings prospects are less certain. Thus the market would price lower business risk with a higher P/E multiple and conversely would price higher business risk with a lower P/E multiple.
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Post by Valuethinker » Mon Aug 24, 2009 5:53 am

bob90245 wrote:
larryswedroe wrote:Markets price risk, not growth.

Could this be refined that markets price business risk? For example, a Growth stock who's earnings prospects are bright pose lower business risk than a Value stock who's earnings prospects are less certain. Thus the market would price lower business risk with a higher P/E multiple and conversely would price higher business risk with a lower P/E multiple.


They also price financial risk.

As per REITs last 24 months.

High leverage means higher risk that the equity will be reduced in value to zero.

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Post by larryswedroe » Mon Aug 24, 2009 6:48 am

Markets price ALL KINDS of risk, including political risks as well as economic risks.

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jeffyscott
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Post by jeffyscott » Mon Aug 24, 2009 11:00 am

larryswedroe wrote:Markets price risk, not growth.


That sounds like you are saying "markets price risk, not (expected) returns". I'd say that they do both. Higher expected growth means buyers are willing to pay a higher price for the stock.

(I suppose you are putting it the way you do because F-F theory would claim that growth stocks have higher prices only because there is less risk.)
press on, regardless - John C. Bogle

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