SOME RATIOS TO UNDERSTAND BETTER THE MARKET.

We have some ratios to analyze and understand better the past and the present – not the future – on the market.

We have the following systems to analyze the SP500.

• General P/E ratio 
• CAPE – Shiller Cyclically Adjusted P/E ratio 
• Tobin’s Q ratio 
• Cresmont P/E ratio 
• The Market Cap to GDP. Buffet's favourite valuation measure 

We could pick up any of different ratios. It is free choice. Here below I have collected together some nice chart how they interpret the recent bullish market. All the different ratios want to answer to the same question. This is a bull market or a secular bear market? There are a bit different in intrepretations but there are some significant correlations either.

General P/E ratio now is at 19,48. Which not extreme at all, but not cheap neither. But if the inflation comes will be downcreased easily.

This chart below shows the Tobin’s Q ratio. The general parameter is if the ratio is over 1 the market is overbought, if below 1 is oversold and undervalued and shows good option to buy. Now this ratio is at 1. So the market is neutral currently. In 1999 was at over 1,4 and in 28 at 0,7. Now we are in the middle. The long term median is at 19,6.

The CAPE ratio by Shiller is at 24,4, the historical mean is at 16,5. So the market is overvalued. In 1999 this rate was over 45 and in 2008 was at 12.

Cresmont P/E ratio here below shows in historical perspective the regression line is constant bullish since 1870. We are above the historical mean but not extremely. In 1999 the rate was at 33,8, which is now at 23,9 and the lowest point in 2008 was at 12,3.

In my humble opinion all chart above tell us that the market is not cheap anymore, but I would not say bloody expensive. But everything is relative. What seems today expensive might be seen tomorrow cheap. All in all in historical view the SP500 is still in bullish sentiment and does not show yet that the bubbles burst.

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The BFM Assets Team.