Summary
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Should sidelined investors wait for the market to pull back in order to gain a better entry point? With profits on a downward slope, how can we determine whether the markets are fairly valued? The problem is that valuation measures become very cloudy during economic turnarounds because price movements and earnings attain extreme levels. Looking back at the past five recessions can, however, give us an idea of things to come.
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Given that, historically, P/E ratios have varied from 14.5x to 16x in end-of-recession periods, a reasonable trading range for the S&P 500 would be 835 to 1000. At 929 last Friday, the composite index was hovering somewhere around the middle.
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In Canada, history tells us that a P/E multiple of 13.5x to 16.0x is reasonable in end-of-recession rallies. For the S&P/TSX, these metrics translate into a trading range of 8800 to 11200. At 10237 last Friday, the index was very close to the upper limit.
