Shiller's P/E Ratio Too High for `Subpar' Economy: Chart of the Day
U.S. stocks are relatively expensive by the standards set in past economic recoveries, according to Bill Hester, an analyst at Hussman Econometrics Advisors.
The CHART OF THE DAY compares the Standard & Poor’s 500 Index’s valuation at the end of July, based on a price/earnings ratio compiled by Yale University Professor Robert Shiller, with those a year after the end of post-World War II recessions.
The S&P 500 ended last month at 20.2 times average profits for the past decade, according to Shiller’s cyclically adjusted P/E ratio. The figure surpassed the average of 16.1 for the economy’s previous nine rebounds, as Hester wrote yesterday in a report.
Even so, indicators such as inflation-adjusted growth, sales to end users, personal income and consumer spending show the economy isn’t faring all that well by historical standards, the report said. Income and spending stayed unchanged in June, the Commerce Department said today.
“The current subpar recovery should probably warrant a below-average level of valuation,” Hester wrote. “Unfortunately, the opposite is true.”
Hester’s analysis assumes the most recent recession, which started in December 2007, hit bottom in July 2009. The National Bureau of Economic Research has yet to determine an end to the latest slump. The bureau’s reference dates were used to gauge previous contractions.
(To save a copy of the chart, click here.)
To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net
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