Maloney: The Uncanny Ratio That Shows Dangerous Territory For Stocks
Price to earnings ratio is one of the most basic valuation tools available to stock market investors. Simply put, it allows you to measure how much you are paying for the ongoing operations and profits of any given public company. Distill it down to its most basic actionable information based on almost 140 years of back-tested data, and you arrive at two hard-and-fast conclusions:
When the S&P 500 P/E ratio is above 27, it in territory that is beyond overvalued. It is beyond bubble valuation. It is in a hyper-bubble, and you should be a very aggressive seller of stocks.
When the S&P 500 P/E ratio is below 5, you are at rock-bottom undervaluation, and you should be buying stocks very aggressively.
Right now? The S&P 500 has a P/E of 33. Higher than the P/E of 32 at the time of the most calamitous crash in stock market history, which precipitated The Great Depression in 1929.
Michael Maloney is a precious metals investment expert and historian. He is the founder and owner of GoldSilver.com, a global leader in gold and silver sales/storage and one of the world's most highly regarded investment education companies. He is author of the highest selling precious metals investment book of all time, Rich Dad's Advisors: Guide to Investing In Gold and Silver