Earlier today, I showed some charts comparing 2008/2009 to the development in 1929. My view today is that if we get a rally from here, I believe if will fail at some point in 2009.
Yesterday Martin Wolf in Financial Times presented some arguments for why equity market valuations are close to long run fair value. He showed a chart, see below, with two measures - "Q" and the "cyclically adjusted price earnings ratio" (Cape), see the article for explanation.
Considering we have been living through the biggest credit creation ever, I would argue that relative equity valuation back to historical lows makes some sense for me which would see equities much lower from here at some point in 2009. The counter argument would be that the actions from policy makers today are much better than in earlier periods as they have learned from history. In the current economic climate expectations for earnings for 2009 are also extremely uncertain as showed in the table yesterday from Ticker Sense.
(click to see full article)
The lowest forecast I have seen for S%P 500 earnings in 2009 has been in the low 60's and with a P/E of 8-10 that would give S&P at the 600 level. If the $ 75 proves to be correct a more fair level would probably be 1125 (15*75) as such a earnings level would indicated reasonable strong macro environment supporting a higher P/E than 8-10.
Trying to be objective (very difficult) the odds until Christmas probably favors some range trading with a positive bias (maybe after the usual post Thanksgiving selling tomorrow) and the real question will be if we get a "1930-like" rally early next year.
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