weekly stock market report snippets, page-98

Voltaire

In addition to a much lower average market PE ratio impacting negatively on the sharemarket, the other big factor to consider is the extent to which current and projected earnings are above the long term average of GDP.

In a recent email from John Maudlin (a US financial adviser) he made the interesting point that current US PE ratios are based on profits representing 14% of US GDP, when historically the average is 7% of GDP. Maudlin is not genrally an alarmist and thinks that while the US has big problems they will muddle through without getting into a depression. However he is now coming round to believe that due to the reversion to the mean that happens in the long term, PE ratios will fall a long way (hence the DOW and S&P 500 will also fall significantly but he would not give a level.

So even if the US manages to artifically keep interest rates down the best that can happen in the US over the next few years is for the main indices to decline.

On the other hand if the US interest rates increase (and it has for the non-govt bonds) then this will also act as a major negative on sharemarkets.

I am not sure how these factors apply to Australia as I am not aware where profits are or have been longer term relative to GDP. I suspect that the Libs managed to shift upwards profits share of GDP during their period in office (eg by importing a lot of cheap labour and IR laws) so there could be scope for a considerable fall in our sharemarket indices over time as our parameters revert to their mean.

loki