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Beware Those Who Say ‘This Market is Cheap’

Filed in Infographics & Chartology , Investing 101 1 comments

Image Source: Chart of the Day

If you’re an avid follower of the financial markets, no doubt you’ve heard a money manager make the claim that “this market is cheap” as a reason to get you, or keep you, invested in the stock market after it’s doubled from March 2009 to present.

Truth is, that claim is just not true.

True, the price to earnings ratio of the S&P 500 hasn’t been this low since 1991. What is not true, is that P/E ratio in the upper teens is  — historically anything but cheap.

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Posted by CJ   @   15 July 2011 1 comments
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Feb 3, 2012
12:47 pm
#1 Lucas :

The data aggregated for the SP500 is an average,which is highly influenced by outliers. Individual stocks may be bargains, or they may be selling at a high premium. Another thing to consider is the nature of a correction, and why it is called a correction. Today, the DOW is like higher than it has been in 4 years. It is in a mini bubble where valuations are too high relative to fair value, based on outsized profits from one-time cuts. Corporations have made all their cuts are sitting on piles of cash, making it harder to find room for future growth. Most forecasted P/Es are coming down, another indication that valuations are too high right now. In fact many stocks are sitting at four year highs with nowhere to go but down. Maybe not tomorrow, but sooner or later, people are going to take their profits on the backs of little investors who get in now because they are worried they will lose their chance. The classic buy-high-sell-low scenario that causes individual investors to historically yield 1-3% (depending on source), while the stock market historically yields 6-12% (again, depending on source).

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