Woried about using the Price to Earnings ratio (“PE”) when the reliability of reported corporate earnings seems shaky?
Analyst Eric Bjorgen of The Leuthold Group argues for an alternative valuation measure–one that doesn’t rely, as the PE ratio does, on earnings in the denominator. That measure is simply the total U.S. stock market (i.e., market cap) divided against the U.S. gross domestic product.
From 1926 to the second quarter of 2002, Bjorgen found that the long-term average for this ratio is 58%, and it has stayed in the 40-80% range for more than 38 of the past 50 years. Yet at the end of 1999, it peaked at 185%. As of the end of June 2002, it had eased somewhat to 104%.