I wrote a post showing the S&P 500 P/E ratio going back to 1871. I then said that if you looked at history, a DJIA of about 9,000 or so was "about right." However, there was criticism in that it is not earnings, but dividends that ultimately give a stock value and therefore should be the base by which to determine if prices were overvalued or not. This is most certainly correct as the only form of cash you will ever receive from a stock is dividends (and then when you sell the stock or the company is bought out, a capital gains).
Regardless, it is the abandonment of dividends for capital gains to finance our retirements that has resulted in a bubble. And even in using the dividend yield (dividends divided by price), the picture painted is much worse. Stocks, even with the crash in the past two weeks are still overvalued based on the only thing that matters; dividends. We're still not even close to the historical average dividend yield of 5%. Ergo, why buy stocks now?
Of course in light of today's 600+ point rally, people are suggesting I have egg on my face and that the bottom has indeed been reached (no doubt from hence forth stocks will perpetually go onward and upward as Obama will be elected and we'll all have warm financial fuzzies). But allow me to point out two minor things;
1. What if all the increase in stock prices for the past 30 years was due to cash flowing into the stock market from retirement plans, not necessarily because those stocks were good investments making them fundamentally overvalued.
2. What do you suppose will happen to stock prices if not only Obama is elected, but the democrats get a veto proof majority?
Enjoy your cute little rally.