Buy the Dips: This Bull Market's Not Over
But looking back, the S&P 500 is within a pretty reasonable range of its average. As I write, the forward price-to-earnings ratio for the big index sits at 16.23. That's even lower than the average forward P/E of 16.6 over the last three decades. Remember, though, forward P/Es are estimated -- focus on past earnings, and that number gets pushed up to a much more hefty 18.7.
Compared with our long-term average of 16.6, that's a relatively high number. The bears are salivating now.
But what that number doesn't account for is cash. And companies have a lot of it right now -- more, in fact, than ever before in history. As I write, cash on corporate balance sheets covers around 25% of the current value of the S&P 500.
I'll say that again for emphasis: A full quarter of the S&P 500's current price tag is paid for by cash on hand alone. Adjust for that huge base of risk-free assets, and suddenly stocks don't look quite so pricey anymore.>>5 Stocks Insiders Love Right Now But wait, say the bears, regular old P/E isn't a good measure of value. Instead, Shiller P/E offers a much better number -- it shows that the S&P 500 is overpriced. Shiller P/E, or CAPE, normalizes earnings over a decade to avoid the pitfalls of unsustainable profits. With CAPE sitting around 24.4 right now, stocks have to be overpriced! But there's just one problem with that argument: Smack dab in the middle of that 10-year data series, we have a prolonged and extreme economic recession with the income statement carnage that comes from de-levering balance sheets. So while earnings bounced back to new highs in the years that followed, Shiller P/E's cyclical earnings include a very temporary earnings event caused by GAAP accounting rules rather than true earnings changes. Translation: Of course stocks look overpriced with Shiller P/E. It takes the new high stock prices of today, and compares them to misleadingly low earnings from the great recession. Normalizing earnings using one of the most abnormal earnings periods in history is like zeroing your bathroom scale with a cinder block on it.
Check Out Our Best Services for Investors
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Model portfolio
- Stocks trading below $10
- Intraday trade alerts