Usually we tend to assess the market based on multiple, more or less common. the most immediate and popular is definitely the P / E, or the price (of a share, index, etc ...) divided the profits.
commonly considered to express, with this figure, how many years are necessary because an investment is paid off through the profits made by companies in which it invests. Technically it comes to discounting future cash flows, and so on.
I do not like, for one simple reason.
as it is not easy to estimate the future profitability of a company (or index, as in our case) and often the forecasts of analysts are also constrained by factors not strictly economic or financial one tends to use the so-called 'retained earnings' (as Reported earnings) over the last twelve months.
at this point the P / E expresses the ratio between the current price and the gains already made: a contradiction if we are convinced that in reality the market discounts the expected future returns.
also in times of particular volatility is the market is earnings this report may be particularly ineffective: for example, the S & P 500 ended 2008 at 903 points, with the loss of $ 23 per share for the fourth quarter's total profits for 2008 were $ 14.88 per share: this implies a P / E above 60!
early as 1934 one of the main proponents of value investing, Benjamin Graham, had proposed to use instead of the simple 'as Reported earnings' of the last twelve months, an average of real earnings (that is actually achieved and adjusted for inflation) over the last ten years.
this approach, which was later taken over and relaunched in recent years, Nobel laureate economist Robert Shiller, an estimate more consistent on the state of assessing the market.
just to give you an idea, at the close of the first quarter of 2009 P/E10 so determined gave a value of 15.6 to be compared with an average history of 16.1.
this chart, as well as an indication that the market in this period is not particularly convenient, suggests quite explicitly the strong correlation between growth in the S & P500 and increased P/E10. among other things, we can verify that, whenever the P/E10 increased from the first quintile (ie a ratio greater than 20) in the fourth quintile (between 10.9 and 14.1) then inevitably has continued down to the fifth quintile (less than 10.9).
on this point has also built a solid starting point for hikes and long-term returns in triple digit:
Now, to get a P/E10 less than 10.9 (or possibly a single digit) need two things, either individually or combined together:
1) a fall in prices of the index (and in this case could not be fetched review the S & P 500 to trade at the 600 points)
2) a substantial increase in profits, given the current state of the economy, I think, unfortunately, the less likely hypothesis
