In my opinion PE ratio's are not very important. The yield is the key to the "core" of the market fair value area. If the market is priced way too far away from it's core the market loves to cycle it's way back toward the core fair value area. From what I have seen over the last three years... This market likes to track the same yield as the market did from 03 to 07. A yield around of 1.8-2%. With interest rates so low investors don't really have any choice but to go after stocks when they get fundamentally under-priced if they are to get any return. As long as there is no systemic shocks like a EU crisis or Iran war oil crisis which causes a temporary price suppression of the market via a supply surge... The market generally is priced properly to the fundamentals of the asset class vs the other available asset classes and their return. http://www.decisionpoint.com/tac/Swenlin.html Current Closing Price.............: 1362 Current Yield.....................: 2.0% The three quarter leading fair value of the S&P 500 is the PE it also likes to gravitate towards too. Est 2012 Q2 Fair Value (SPX if P/E = 15): 1386 PE IMO isn't as important and is more physiological than fundamental. What does this mean? The fair value area the market will gravitate back toward is around 1375-1425... Delusional rallies toward 1500 and delusional sell-offs toward 1200 will eventually snap back toward fair value area provided the ECB and the Fed can hold the system together. Been watching this for years and it's always correct. The market always snaps back to it's proper fundamentals after delusional euphoria and irrational panic. Supply/Demand of the asset class follows it's fundamentals on "Average".
This is mostly useful to investors in making decisions on long term positioning. The deeper the crash the farther supply/demand can recover toward the fundamental ranges. The bigger the temporary demand suppression caused by a panic the bigger the rally potential. The fed has and always will save the market unless the system itself were to end. Just buy the crashes and don't worry about it like warren buffet. The market will always return to supply/demand equilibrium with the market fundamentals. If buying crashes were not to work anymore... You wouldn't need to be worried about the market, because there would be no more US stock market period and it would be Armageddon. So, as many investors have said... Just buy the crashes and sell into the euphoria. There is no other choice if you want to make money as a long term trader/investor. To the naysayers who say the market could go down to S&P 300-500 and stay there... That won't happen. If the market were to go that low the system would go into a death spiral to zero... A global reset with all stock markets closed and a lot of fiat currencies blown up. Don't worry about it because there wouldn't be anything you could do anyway except hide in the woods with some military quality semi-auto M16's and buried silver and gold. The entire government retirement system and everything is linked into the stock market and the 401k/etc system... Stock market levels will be defended and protected like never before because the vested interest in keeping the system together is so high. The stock market in the past wasn't linked to the stability of the system, but nowadays it is.