listen to a very good explanation of why the stock market is very overvalued...
and why you should NOT buy now...
probably should run for "cover"...!!!
This analysis uses the work of...
"the price-to-earnings multiples developed by Yale economist Robert Shiller, who smoothes the erratic swings in profits by calculating PEs based on a 10-year average S&P earnings, adjusted for inflation."
Please, note, that this is the same Shiller who provides U.S. with one of the best measures of home value changes, each month, year, decade.
You should, economically, read this whole article, more than once.
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2010's coming stock market crash: 1987 all over again
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In the fall of 1987, stocks were on a tear. The Shiller PE had doubled to 18.3 in just four-and-a-half years. That's far above the historical average of less than 14 (though pales in comparison to recent giant PE numbers). The dividend yield was also an extremely narrow 2.6%, well below the norm of around 4.5%.
When the carnage ended, the PE had dropped to 13.3, around its 60-year average, and the dividend yield was approaching 4%
From early 2008 until March of 2009, stocks suffered a steep decline that echoed the 1987 correction
During that period, PEs fell from the low 20s to 13.3, precisely their level following the '87 crash. Once again, dividend yields approached 4%
By early May of this year, the PE had soared back to almost 22, shrinking the dividend yield to 1.8%. In recent days
Today, the yield is 1.8%. Earnings per share typically grow at a "real" rate of around 1.5%, way below the pace that Wall Street advertises. So the total gain from investing at today's prices is 3.3% or so, plus around 2.5% for inflation, for a total of between 5.5% and 6%.
For the S&P to return to a PE of around 14, the index would need to drop by around 33% to less than 800
For the S&P to return to a PE of around 14, the index would need to drop by around 33% to less than 800
Now let's look out a decade or two. The evidence is extremely strong that price matters, and matters a lot: except in rare cases, buying stocks when they are pricey -- when the Shiller PE exceeds 20 -- leads to puny returns ten years later.
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