Thursday, August 9, 2012

Does the Current S&P 500 Price Jive with Reality?

If you watch the stock market closely each day and follow analyst reports from the financial media, then you have been inundated with talk about the Price-to-Earnings Ratio (P/E) of the broader stock market (i.e. - the S&P 500). The historical "average" for the S&P 500 is a P/E of 14-15. When I look at this "average" valuation, I assume that the possible risks that could hurt the economy are also "average". With the S&P 500 sitting right at the average P/E ratio, one should ask are we in an "average" period of global uncertainty? Given the crisis in Europe, China slowing, and the US sputtering along with a fiscal cliff hanging in the balance - I would say the risks are "above average".

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