Brave New World: Here's what PE valuations say about the market

Ritesh Jain, a Dalal Street veteran, trend watcher and Global Macro Investor, captures global macro investment opportunities and economic, business and financial trends with charts and commentaries in this space

While not exactly a chart, Russell Napier has changed his view and wrote an article titled "The dawning of age of inflation". He expects inflation to cross 4 per cent in the developed world by 2021.

A key reason the US middle & working classes have seen stagnant relative real income growth over the past 45 years, in a single chart.

Let’s talk about valuations. Forward price-to-earnings (P/E) sits at 22.4. Median P/E (my favorite indicator, which looks at actual trailing 12-month earnings) sits at 24.6. For comparison purposes, the 52-year average, call it “Fair Value,” is 17.3. That suggests the S&P 500 Index’s fair value is 2,134.06. More than 30 per cent below today’s level of 3,202. And it’s not just price relative to earnings. It’s price-to-sales, price-to-operating earnings, price-to-book. Price-to-everything is expensive. Here’s a look (red is bad):

Time for a new chart