We can sit here and shiver in fear all we want, but the stock market definitely knows something. We have a huge liquid pool of money to make sure this machine keeps ticking. We've cited many of the economic factors that have encouraged this liquidity binge. It is a little early to predict, but as conditions improve, corporations and individuals will decide they want to use a little of that money, and finally banks will start making some loans to someone except those fat cats that don't really need the money. That is where we are, and as this fulcrum point passes, the stock market knows it. Take a look at this "13" milestone that is just being passed.
I recognize that the size of the graph makes the last few weeks a little hard to decipher, but it is very obvious that there is NO "right" P/E ratio. You can also see that as inflation came down (1978 to 1992), the P/E ratios moved up. The "Turbulence Phase" of the stock market, when the "crazies" took control of stocks in 1998-2000 pushed the P/E ratio much higher, but it will be very interesting to see if the Technology Revolution will not produce a higher zone of valuation in the years ahead when the crisis mentality fades. It certainly helps profit margins and productivity.
The good news is that for the first time since the rebound from the Financial Crisis in 2008, the P/E ratio has just sneaked above that 13 range that has contained it for the last two years. The stock market knows something.
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