Sunday, January 18, 2009

Fair Value For Equities

I last took a look at this in a post from 11/11/08. Since then, there have been some major changes in the financial sector, as well as the retail sector..........

Based on past peak to trough valuations, Standard & Poor's estimates and some good, old fashioned gut feeling:

Average trailing 12 month earnings for the S&P 500 for 2009: $38.63

Average earnings yield since 1988: 4.882%

38.63 / 4.882% = 791.11

A level of 791.11 on the S&P 500 roughly equates to a level of 7,534.36 for the Dow Jones Industrial Average. Currently, the indices are trading at 850.12 and 8,281.22 respectively.

This would imply a drop a continued drop of about 8% from current values. Quite simply, earnings yields are not high enough to buy stocks.

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