There are good news and bad news. The good news is the market is trading under its long term PE average. The bad news is markets always have to overshoot the average on the downside. Look at chart attached.
The long term adjusted PE ratio is 17 and we are trading at an adjusted PE of 15. Real earnings have grown by 15% from the burst of the tech bubble in April 2001, while real prices have declined by 42% in the same period. Also real dividends have increased by 47% over the same period. Off course the market was over valued at that point with an adjusted PE ratio of 34x and as a result the PE ratio have contracted by 56%.
The decline in equity prices have made valuation look attractive. The contraction in prices and PE ratios have outpaced the real increase in earning and dividends. This makes the market attractive for meaningful equity investment.
However, there were no significant bull market in history that began with a double digit adjusted PE ratio. The bull market of 1880s, 1920s, 1950s and 1980-1990s all have started with an adjusted PE in single digits. The bull market of the 1920s started with PE ratio of 5x and ended at 35. The bull market of the 1980-1990s began its run with an adjusted PE ratio of 8.7x and ended with a staggering ratio of 45x.
So until we get to an adjusted PE ratio of under 10x do not buy all at once. Pace your purchases. And because I do not want to time the market I will buy some at the present, which I did by taking advantage of these prices, and allocate funds for later time if markets decline further. At this pace of decline we will get there very quickly.
Economic headlines are always bad and factor in worst case scenarios entering a recession. There is nothing new in this recession that will make it any different from the others. It may be longer but there is no question that businesses will adjust and grow their earnings. As a result investors who buy at attractive valuation will make good returns in the long run.