Mainstream Media Discovers Long Term Stock Value Measures

Readers know that I place strong reliance upon long term measures of stock values. Planners are usually not traders and there is a BIG distinction between trading and investing. I find that most mainstream media outlets (WSJ, CNBC, etc) are nearly universally focused on the former and not the latter. How refreshing therefore to find an article in the NY Times (Economix) that discusses a favorite measure of mine: Shiller's PE10, "Stocks Start Looking Dear Again" by David Leonhardt. What does it say?

Corporate profits may rise or fall in any given year depending on the state of the economy, but a share of stock is a claim on a company’s long-term earnings and should be evaluated as such. And over the past century or so, there has been a pretty strong correlation between the 10-year p-e ratio and future returns. When the ratio shot above 20, as it did in the 1920s, 1960s and recent years, stocks were headed for a fall. When the ratio dropped well below its 100-year average of 16, as in the 1930s and the early 1980s, a bull market typically followed. (The average of the past 60 years is about 18.5)

What does the ratio say today? That perhaps the recent rally has gone a bit too far.

The article gives links to history of the indicator and its development. It's short and worth a read. My usual cautionary note: These long term indicators say NOTHING about the direction stocks will take in the short term. Enjoy.