Stocks are Cheap. Very Cheap

The following are the median price earnings ratios of the Russell indices.  The first ratio is the PE relative to 2008 earnings, the second is the PE relative to forecasted earnings for 2009.

Russell 1000 - 8.1x, 9.6x
Russell 2000 - 7.0x, 8.4x
Russell 3000 - 7.5x, 9.0x

The Russell 3000 is an index of the largest 3000 stocks in the United States.  The Russell 1000 is an index of the largest 1000 stocks.  The Russell 2000 is an index of the next 2000 largest stocks.  The Russell 1000 and Russell 2000 indices make up the Russell 3000.  Generally, the Russell 1000 is an index of large-capitalization stocks while the Russell 2000 is an index of small-cap stocks.

People making the argument that stocks are expensive are misleading you.  The reason why earnings have collapsed is because of write-offs in the financial sector.  Most stocks are not financial stocks, and relatively few companies in the universe of ~3000 stocks in the Russell indices have taken or will take large write-offs.  Thus, a true gauge of the market's valuation is the valuation of the average stock.

And the average stock is cheap.  Very cheap.

Comments

[psychodave]

We could call the bottom in the stock market when the Russell 2000's default rate peaks.

That's only if (ahem) some kind blogsoul out there were to provide the relevant graph, posted on a weekly basis.

[bill chan]

I don't know if the average stocks are cheap. I only know financial companies are in deep trouble, credit is lacking, the average companies are not selling, empolyees are losing jobs, thus cutting retail purchases, the average companies are in turn getting less sales and thus firing more workers in a spiral; the result will be reduced earning in the next few qtrs, it is really hard to calculate stock value.

[Greg]

You know Toro, stocks are cheap. Clearly, clearly, clearly to anyone who knows anything real about valuing them, instead of simplistic slogans or PEs without context and worries about the next couple of quarters which is easy to adjust for. I run implied discount rates and compare to history. Absurd. This is a liquidity event. People need liquidity. They are about to retire. So at the same moment I say absurd, I realize that the more liquidity can be withdrawn, the more dangerous we are towards having a real "capsizing" of the economy into a lengthy "event". Unfortunately it leads me to the conclusion that I don't want to get overcommitted, because I have been. In the long run you're 100% right. Paraphrasing Clinton... it's the short run stupid. (not saying you're stupid).

[bastiat]

Toro,

Any thoughts on REITs?

[Toro]

Bastiat

REITs are cheap.

However, commercial real estate is deteriorating.

If you have patience, you will get them cheaper.

T.