The following comments and questions came in via e-mail:
I read this [Secular Valuation Contractions] as Mr. Deemer suggested but I ran a chart on S&P prices with a PE overlay from 1959-2010.
1. It looks to me like most of the "secular decline" might be over. It started in 2000 and made a "double bottom" at around 12 PE already in 2009 and 2011.
2. PE's peaked at 22 in 1962 and 30 in 2000. From 1962 the PE made a "triple bottom" in the mid single digits and the first was in 1975 (12 years). the first one in this decline took only 9 years but was a proportionate in its reduction.
So I guess my question is: Hasn't the market already adjusted for risk premiums i.e. sluggish growth, economic uncertainty, fiscal policy mess? I mean right now, this market is only priced to return in the low to mid single digits as it is? It looks to me like there is a lot more risk in the bond market. As an alternative, don't stocks look like a much better value?
I responded thusly:
Unfortunately, a P/E of 12 is a lot closer to the series' mean than its lows. I agree with you that there is a lot of long-term risk in bonds, but I'm not sure that equities are a particularly safe haven at these levels; the long-term corrective forces at work don't look like they've run their course yet.
Walter Deemer
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Secular Valuation Contractions