2013’s stock markets gains have taken away around half of the upside market had going into the year. Stocks used to be selling for a deep discount, now they’re meerly on sale.
These charts are through January when the Dow was around 150 points lower.
DJIA
Here’s a chart of the Dow Jones Industrial Average (DJIA) going back to July 2009.
The stock market has had two big corrections in 5 1/2 years, but has steadily risen overall. This chart show’s the market’s rise, but doesn’t show when stocks were on sale, as the next chart does.
P/E Ratios
To the right is a chart of P/E ratios for stocks with earnings (profits). Low P/Es mean stocks are on sale, high P/Es mean stocks are expensive. I see the number 16 as being the equator in this chart. The market’s P/E should at least be 16. When it was 14 for much of last year, stocks were very undervalued, they were cheap. This year stocks are up, and P/E ratios have risen too. Unfortunately, that’s taken away a lot of upside we had going into the year.
Although the market gain’s aren’t great (Dow up 6% YTD through one month), a lot of upside potential has been used up.
Sharek’s Take
I think stocks should have a P/E of 18. The P/E’s gone from 14 to 16 during November through January, and that’s taken away a lot of upside. Stocks are still on sale, they just aren’t selling at a deep discount like they used to.
