Crestmont Market Valuation Update
June 2, 2015
by Doug Short
Quick take: Based on the May S&P 500 average of daily closes, the Crestmont P/E is 99% above its arithmetic mean and at the 98th percentile of this fourteen-plus-decade monthly metric.
The 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 we include the Crestmont Research data to our monthly market valuation updates.
The first chart is the Crestmont equivalent of the Cyclical P/E10 ratio chart we've been sharing on a monthly basis for the past few years.
The Crestmont P/E of 27.7 is 99% above its average (arithmetic mean). This valuation level is similar to the 94% we see in the latest S&P Composite regression to trend update and higher than the 62% above mean for the Cyclical P/E10 (more here).
The latest Crestmont P/E puts the current valuation at the 98th percentile of this fourteen-plus-decade series.
Ed Easterling's Comments on the Latest Crestmont Valuation Numbers
|The Crestmont methodology is based upon GDP/EPS regressions and GDP forecasts. It is revised each year based upon available GDP data as of Jan 31. There were slight revisions to GDP over the past year (affecting the regressions) and GDP is estimated to be less in 2014 than was originally forecast at this point last year. Also, the forecast for future GDP growth now includes a 1.5% inflation factor rather than 2.0% based upon recent trends and levels (almost no impact on current data; only on longer-term projections).
The net impact is that normalized EPS for Jan 2015 is about $1 less than the previous estimate. Therefore, the current normalized P/E is slightly lower than you might have expected from Jan's market decline (due to normalized E being slightly lower). I mention this just so you are aware; the apparent difference is fairly minor and won't distort the data or trend enough to really notice.
For a better understanding of these charts, please see Ed's two-part commentary here:
Note: See Ed's Unexpected Returns: A Course of Insights, an online, on-demand video-based presentation that discusses key concepts from his book Unexpected Returns
Ed Easterling is the author of Probable Outcomes: Secular Stock Market Insights and award-winning Unexpected Returns: Understanding Secular Stock Market Cycles. 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.