P/E Expansion & Contraction - Secular Stock Market Cycles

Good post from Barry Ritholtz.

Yesterday, Peter Boockvar referenced two WSJ articles on P/E: The Decline of the P/E Ratio and Is It Time to Scrap the Fusty Old P/E Ratio?

I believe these articles are asking the wrong question. Rather than wondering if the value of P/E ratio is fading, the better question is, “What does a falling P/E ratio mean?” The chart below will help answer that question.

We can define Bull and Bear markets over the past 100 years in terms of P/E expansion and contraction. I always show the chart below when I give speeches (from Crestmont Research, my annotations in blue) to emphasize the impact of crowd psychology on valuations.

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Related book: Unexpected Returns: Understanding Secular Stock Market Cycles