Robert Shiller, as some of you know, is arguably one of the finest economic minds in the US. Which is of course why he isn't in Obama's cabinet.
Regardless, he has hands down the best economic data regarding a very important measure, the Price to Earnings Ratio.
Now I've mentioned this ratio before as to how it is used to gauge whether a stock is over or undervalued. By comparing the price of a stock to it's earnings you compare essentially what you pay versus what you get. The resulting ratio the Price to Earnings Ratio or "P/E" ratio essentially shows you what you pay in stock price for one dollar in earnings.
Historically the average stock represented by the S&P 500 has traded around a P/E of 15, denoted by the horizontal blue line. And though the stock market has taken a 25 year hiatus from sane and rational valuations due to dotcom bubbles, housing bubbles, oh and that whole thing where the Baby Boomers were told to invest their money in the stock market for retirement, it has finally returned to a more sane P/E of 13 (as Dr. Shiller FINALLY updated
this somewhat vital statistic on his web site);
Now a lot of people would say, "wow, gee whiz, now is the time to buy! We're finally below 15" but hold on there little buckaroos. There's just one little catch.
The "E" in the P/E ratio is earnings. Earnings from the previous 12 months. In other words, the past. The problem is the past is not what concerns people or drives stock prices. It's the future, and right now the future looks bleak. Sure earnings were alright for 2008, but 2009 they look to be horrible. And while the P/E ratio may be lower now, if earnings drop, then "E", the denominator of the P/E ratio will also drop, driving up the P/E ratio, meaning you're still paying too much P for what is going to be a dwindling or not existent E. Long story short, you could easily see a Dow Jones of about 5,000.
But don't worry about it, I hear Obama will save us.