Friday, March 20, 2009

Earnings and dividends in the doldrums

The dividend yield for the S&P 500 based on the most recent quarter is only 2.75%, which remains highly overvalued and outside of the normal range of 3%-6%. In order to return to an historically average yield of 4.5%, the S&P 500 index would have to fall to about 485, which is a 37% drop from here.

Meanwhile, earnings continue to deteriorate. The projected real P/E ratio of the S&P 500 for the summer quarter of 2009 is an other-worldly 243. The forecast for the end of 2010 sees a more reasonable but still overvalued P/E of 19, however I don't really trust any forecast at this point given the earnings crash that earlier forecasts missed.

3 comments:

Anonymous said...

Hey Jody,

Have you looked at Yale Prof. Shiller's S&P data? It has P/E over 10 years + adjustment for inflation on the prices. The 243 number from the S&P data comes up because the P/E is calculated over 1 year. P/E 10 is more reasonable but is still overvalued because of the high earnings in '06 and '07 due the leverage used which isn't gonna come back anytime soon.

For grins... try fitting an exponential curve through the data. Try it also considering only the post WW1 and WW2 data.

http://www.econ.yale.edu/~shiller/data/ie_data.xls

Vin

Anonymous said...

I am curious as to whether you have had previous success in calling a market bottom.

Thanks.

Jody Wilson said...

For a couple of years leading up to the top of 2007, I was repeatedly cashing out before corrections (5%-10%) and re-investing at lower prices. However, this is the first official bear market (>20% drop) that I'll have a chance to "call bottom" for. I wasn't even trying back in 2002.

Bear markets don't come along very often, so there can't be too many people out there who are experienced at predicting the bottoms. If there are any, they probably aren't blogging about it for free!