High PE's

The folks at Chart Of The Day have taken a look at historical PE ratios. Link and comments at the end.

Today's chart { shown above} illustrates how the recent plunge in earnings has impacted the current valuation of the stock market as measured by the price to earnings ratio (PE ratio). Generally speaking, when the PE ratio is high, stocks are considered to be expensive. When the PE ratio is low, stocks are considered to be inexpensive. From 1936 into the late 1980s, the PE ratio tended to peak in the low 20s (red line) and trough somewhere around seven (green line). The price investors were willing to pay for a dollar of earnings increased during the dot-com boom (late 1990s) and the dot-com bust (early 2000s). As a result of the recent plunge in earnings and recent stock market rally, the PE ratio spiked and just peaked at 144 – a record high. Currently, with 97% of US corporations having reported for Q2 2009, the PE ratio now stands at a lofty 129!

Link to their main site {subscription required}: http://www.chartoftheday.com/Free_Chart.htm

Commentary: I thought it was important to post this chart because it shows one of the the opposing arguments to all the positive vibes the market is currently throwing out. However it is unclear to me whether this is looking at historical PEs or estimates going forward. Right now we are likely in the bottoming process of what should prove to be the steepest recession since the 1980s. We've also likely stepped back from the abyss that was Great Depression Part II so I'm not sure that these numbers have much value. If these are historical PE numbers we're looking at regarding 2008 and 2009 then the analysis is pretty meaningless. It may also be meaningless if they're using future estimates. These future eanings numbers are likely too low right now if the recession is ending. Still it is the opposing viewpoint currently being talked up in certain camps and I think you have a right to know what some of those viewpoints are.