Crestmont Market Valuation Update
The May 2011 article P/E: Future On The Horizon by Advisor Perspectives contributor Ed Easterling provided an overview of Ed's method for determining where the market is headed. His analysis was quite compelling. Accordingly I include the Crestmont data to my monthly market valuation updates.
The first chart is the Crestmont equivalent of the Cyclical P/E10 ratio chart I've been sharing on a monthly basis for the past few years.
The Crestmont P/E of 20.4 is 49% above its average (arithmetic mean) of 13.7. This valuation level is quite close to the 45% variance we see in the latest S&P Composite regression to trend update and somewhat higher than the 33% above mean for the Cyclical P/E10 (more here).
The Crestmont P/E of 20.4 puts the current valuation at the 91st percentile of this 140-year series.
Because inflation is a key driver for direction of P/E multiples, I occasionally update this chart twice a month if the mid-month release of the Consumer Price Index marks a significant change in the annualized rate of inflation.
For a better understanding of these charts, please see Ed's two-part commentary here:
And this article explores a key concept for investment expectations and planning.
Ed Easterling is the author of recently-released Probable Outcomes: Secular Stock Market Insights and award-winning Unexpected Returns: Understanding Secular Stock Market Cycles. Further, he is President of an investment management and research firm, and a Senior Fellow with the Alternative Investment Center at SMU's Cox School of Business where he previously served on the adjunct faculty and taught the course on alternative investments and hedge funds for MBA students. Mr. Easterling publishes provocative research and graphical analyses on the financial markets at www.CrestmontResearch.com.
