Sensible Investing

Dow 4,000

January 26, 2009

In my previous post, I wrote about disparity of reports for the PE ratio of overall market, which range from 10 to 19.5.

Armed with high version of the PE ratio, some commentators state that the market is still overvalued, since PE at historic market bottoms (such as in 1970′s) tends to be just under 10.   To get to that valuation, they contend that market may well fall another 50% from the current levels.  Optimists counter that current PE ratio (whatever it may be) is inflated by bank losses, and by the fact that extremely low interest rates justify higher stock valuations.

Can the market drop another 50%?  Certainly, stranger things have happened before.  But I don’t think it is likely.  The abundance of pessimistic articles like this typically points to a market nearing its bottom.  For more discussion on this subject, take a look at this article from the Motley Fool.

Entry Filed under: Market Conditions. .