Money manager Wade Slome of the Investing Caffeine blog is out with a longer-term view of stocks and relative valuations that I think belongs somewhere in the broader dialog. He does admit that some double dip scenarios are believable, but regardless, he sees today’s market PE of 13 as a steal versus the market of ten years ago that was selling at a 27 multiple….
What many pundits and media mavens fail to recognize is S&P corporate profits have virtually doubled since 1998 (a historically elevated base), despite market prices stuck in quicksand for a dozen years. What does this say about the valuation of the market when prices go nowhere and profits double? Simple math tells us that all stock market inventory is selling for -50% off (the market multiple has been chopped in half). That’s exactly what we have seen – the June 1998 market multiple (valuation) stood around 27x’s earnings and today’s 2010 earnings estimates imply a multiple of about 13.5 x’s projected profits. With the rear-view mirror assisting us, it’s easy to understand why pre-2000 (tech bubble) valuations were expensive. By coupling more reasonable valuations with a 10-Year Treasury Note trading at 3.19% and lofty bond prices, I would expect stocks to be poised for a much better decade of relative performance versus bonds. The case becomes even stronger if you believe 2011 S&P 500 estimates are achievable (12x’s earnings).
Wade is is my favorite type of financial blogger – a practitioner – so head over to IC for the rest.