NYT: Why the Bear Is Alive and Well

Over the weekend, Paul J. Lim wrote in the New York Times:

If there’s a silver lining to bear markets, it is that they make stocks cheap for the next wave of investors. But so far in this downturn, it isn’t working out that way.
Based on the price-to-earnings ratio, stocks have actually become more expensive even as share prices have come tumbling down. In fact, the P/E ratio for the Standard & Poor’s 500-stock index, based on earnings over the previous four quarters, has risen to just over 24 from around 19, according to S.& P.

Superficially, that’s correct. The problem is that the earnings decline is heavily weighted toward certain sectors — most particularly financials.
We don’t have the final numbers in yet, but the earnings of the financial stocks in the S&P 500 will probably be about -0.01. The S&P 500 Financials Index is currently around 300. So that’s a P/E ratio of…negative a lot. Consider that financials make up about 16% of the index, and I think we’ve found the squeaky wheel. Compare that with Health Care which is currently going for 15.6 times earnings or Staples (18.0), Tech (18.1) and Industrials (13.8).
Bear markets generall come in one of two forms. Either stock prices shoot past reality as they did in 1987 and 2000. Or fundamentals crumble beneath prices, which is what happen in 1990 and is happening again.

Posted by on September 9th, 2008 at 11:00 am


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