A September 1 Financial Times rolled out the bullish guns and suggested US large cap stocks could be "the bargain of a lifetime." The expert added: "Stocks haven't been as cheap relative to bonds since 1951," when he himself was just one year old and lacked the "sentience" to invest. "I do now," he focused. "And if you are reading this, so do you."
So basically, unless you're a newborn baby with a still developing brain stem, you should have the good sense to buy stocks right now. The rationale is simple: Last month, U.S. equities suffered their worst August in nearly a decade, all the while absorbing one dismal economic blow after another. Yet -- in the first four days of September, the market enjoyed a powerful, uninterrupted rally.
Ipso facto: The bloodletting has ended. The scent of deals is strong. And now is the time to take the bargain hunting rifles off the shelf.
In the words of a recent news sources: "The protracted tug-of-war in the equity market came to an abrupt halt on September 1. The bulls will now have their sweet rollicking time and investors should enjoy it." (Daily Finance)
And -- "Stocks are dramatically cheap. You're talking five or six decades cheap in terms of their value. The price-to-earnings ratio is at 12 times forecast earnings." (Bloomberg)
EWI President Robert Prechter showed a major problem with this notion years ago: P/E ratios are about as useful as tea leaves for gauging the actual health of stocks. The reason being, analysts' projections of future earnings tend to be wildly optimistic at market tops, and markedly pessimistic at market bottoms.
Case in point: 2008. In May of that year, the U.S. stock market had kissed its October 2007 peak goodbye in a gut-wrenching sell-off to three-year lows. With the collapse of Bear Stearns and subsequent financial implosion, many mainstream experts saw a familiar bottom-feeding bright spot in the knock back.
"The market is turning around here," remarked one May 3, 2008 Bloomberg. "This move will take us to the 2007 highs before the end of the year."
But by November, the rout had intensified. Stock values had been slashed by more than 50% and stood at their lowest levels in a decade. Again, here's what a November 21, 2008 MarketWatch had to say of the road ahead:
"Over the long haul, the gravity of fundamentals and valuations drives returns. Based on 2009 projections, the P/E on the Standard & Poor's 500 Index was around 10, the cheapest valuation in decades... This suggests that valuation levels are helping to create a floor for equity prices."
Said "floor" did not transpire until the market plunged another 3,000 points to a 12-year nadir in March 2009.
In the end, the "E" in P/E ratio can very well stand for "Emotion." The very same hope and fear that drives speculation into and out of stocks by investors ALSO drives the expectations of future earnings by analysts.
Here at EWI, the only way that we measure the "true" value of stocks is with the objective metrics of the Wave Principle; such as: Elliott wave patterns, Fibonacci time and price relationships, volume, sentiment extremes, and the like.