Tags: Hulbert | interest | rates | PE

Hulbert: Low Interest Rates Don't Justify High P/E Ratios

By    |   Wednesday, 16 July 2014 11:03 AM

Mark Hulbert, editor of Hulbert Financial Digest, has bad news for the stock market.

Many stock bulls argue that the historically high price-earnings ratios (P/E) that currently prevail are justified by the historically low interest rates that currently prevail. But that's bunk, Hulbert argues in his MarketWatch newsletter.

A decade-old study from Clifford Asness, founder of AQR Capital Management, proves the point, he says.

Editor’s Note:
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Asness, looking at data from 1926 to 2001, found that P/E ratios have less value for predicting the S&P 500's returns when adjusted for interest rates.

"That is bad news for today since the stock market’s current P/E is well above the historical average," Hulbert writes. The S&P 500's current trailing P/E of 19 compares with an average of 15.5 since 1871.

"How did anyone ever come to believe that the P/E should be adjusted by interest rates?" Hulbert says. "I can think of two possible explanations: one based on lazy thinking and the other on Wall Street’s bullish bias."

Meanwhile, Michael Hartnett, chief investment strategist for Bank of America Merrill Lynch (BAML), maintains that investors' strong optimism for stocks probably presages a market correction in the fall.

Fund managers' equity allocations advanced to their second-highest level in 13 years this month, according to BAML's Fund Manager Survey. A net 61 percent of the 228 managers surveyed are now overweight stocks.

"Investor sentiment is beginning to melt-up," Hartnett wrote in the report, CNBC reported. "The summer melt-up is likely to be followed by an autumn correction.

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Mark Hulbert, editor of Hulbert Financial Digest, has bad news for the stock market.
Hulbert, interest, rates, PE
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2014-03-16
Wednesday, 16 July 2014 11:03 AM
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