Climbing back into US equities? Take your time . . .

This diagram is a scatter plot of lagging PE ratios against subsequent market performance.  Amongst other things it demonstrates the wisdom in hindsight of Alan Greenspan’s first warning about ‘irrational exhuberance’ which his subsequent utterances seemed to repudiate. Real returns from investing in US equities at the time were near zero for the next twelve years.

The point for 1996 is close to the regression line and the grey point represents October 2008 (wth the twelve years of subsequent performance inferred from the regression line).  The market has fallen since, but still there doesn’t look like there’s a big hurry to jump in.

The diagram comes from Recent Stock Declines: Panic or the Purge of “Irrational Exuberance”? by Christopher D. Carroll which you can download for free if you register.

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13 years ago

I’m not going to register for this kind of junk.

Just eyeballing the dots on the graph, I think that the fitted line should be closer to vertical. This, in and of itself, tells me that the t-statistic is probably close to zero, there’s low correlation, and that the Graham ratio is probably worthless.