Thursday, July 26, 2007

No Reason to Panic Despite the Down Jones Dropping 310 Points

So the Dow Jones dropped by 310. So what?

Unlike the idiots who I graduated with from college during Dotcom Mania, that drove stock prices to insane levels the average US stock is accurately valued, based on historic measures, namely the P/E ratio.

The S&P 500's P/E ratio is at about 16 right now, just one point higher than its historic average of 15 since 1928. This is in contrast with a P/E ratio of 61 at the height of Dotcom Mania.

I know that the recent bull market may have some cautious minds scared, but unlike our last bubble the earnings are actually there, legitimazing the Dow's current level.

Additionally, corporate profits are at an all time high relative to the economy.

Corporations, unlike their government and citizen counterparts, are actually very efficient with their money, squeezing ever more profit out of their sales and assets. You may be a beer drinking slob, watching American Idol and the local sports franchise but the corporation you work for is actually a bit more hard working than that.

So do yourself a favor and relax. The only way stocks are overvalued is if there's a recession on the way...oops.

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