How expensive are stocks?

Too often, responses to the question reflect the responder’s investment situation. If investors are long equities, they typically answer, “not very.” If investors are short, or in cash or other risk assets, their response is the opposite.

For today’s chart, I wanted to look at the question by considering various price-earnings ratios relative to historical averages.

Uploaded by UUID:7953017 at 6/4/2014 12:16 PM

The chart above, courtesy of Bespoke Investment Group, shows three very distinct valuation eras.

The long-term average, from the 1929 to the present, has the cheapest P/E ratio at 15.35. The period includes several long stretches where stocks traded at a huge discount -- some of the post-crash 1930s, most of the 1940s, all of the 1950s, all of the 1970s and early 1980s.

Looking at the P/E ratio over the past 25 years, we see something different. The average, at 18.90, is much higher. Almost the entire period shows a P/E ratio above the long-term average. No surprise, considering it includes the mayhem of the dot-com era as well as the no earnings/low earnings of the financial crisis.

Lastly, consider the past decade. The P/E ratio split the difference between the other two, averaging about 16.95. Stocks are cheaper than they were over the prior 25 years but more expensive then they were over the prior 85 years.

To contact the author on this story:
Barry L Ritholtz at