With the S&P moving back to new all-time highs, the debate over valuation levels in the stock market is heating up again. Therefore, this would appear to be a good time to continue our in-depth look at a multitude of valuation indicators.

Much of the attention last week was focused on Robert Shiller’s CAPE (Cyclically Adjusted Price to Earnings) Ratio, which we reviewed last Monday. The views on what to make of this indicator vary widely. But, most analysts recognize that the CAPE Ratio is a very, very long-term indicator. In fact, the key takeaway from the chart of the indicator (which goes back to 1900) was summed up nicely by Professor Shiller himself. Shiller wrote, “…we should recognize that we are in an unusual period, and that it’s time to ask some serious questions about it.”

In essence, Shiller is saying that the market, according to his view of valuation, is currently in rarefied air and that investors should take note. However, in looking at a variety of other valuation indicators, this message doesn’t come through.

So, let’s dig into some data…

The Median P/E Ratio

The problem with using an average of the Price-to-Earnings ratio over time is that temporary distortions can have a large impact. Therefore, one alternative is to use the median of the actual 12-month trailing earnings (fully diluted for extraordinary items) of the S&P 500.

It is said that a picture is worth a thousand words, so please spend a moment with the chart below. The chart illustrates the Median P/E Ratio for S&P 500 plotted on a monthly basis from 4/1/1964 through 7/31/2014.


Click for Larger Image
There are several points that can be taken away from this chart. The first, and perhaps the most important, is the fact that there are two clearly different “eras” of valuation portrayed here.

Read the rest of the report…

 

David Moenning

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www.HeritageCapitalResearch.com

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David Moenning is the founder and chief investment strategist for StateoftheMarkets.com, a website dedicated to investor education and portfolio analysis. Mr. Moenning is also President of Heritage Capital, a privately owned, investment research firm. Heritage focuses on active risk management and an “own the best and ignore the rest” equity selection strategy.

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The opinions and forecasts expressed are those of David Moenning, President of Heritage Capital Management (HCM) and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security or Heritage Capital program. No part of this material is intended as an investment recommendation. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any of HCM’s programs. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that investment objectives outlined will actually come to pass. Investors should consult an Investment Professional before investing in any investment program. Neither Mr. Moenning or Heritage Capital Management nor any of their employees shall have any liability for any loss sustained by anyone who has relied on the information contained herein. Mr. Moenning and employees of HCM may at times have positions in the securities referred to and may make purchases or sales of these securities while this publication is in circulation. The analysis contained is based on both technical and fundamental research. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.