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Friday, April 24, 2009

 

how to evaluate equities


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I've been wondering how much weight the price/earnings ratio arguments for stocks should carry right now. According to US stock market history and graphs like this, P/E ratios should fall further, as I know they are currently high. Future earnings and the effects of stimulus are of course a big wild card but there are certainly reasons for further caution.

I had trouble finding a similar history for Japan's stock P/E. Best I could find was this, which doesn't show the scale very well, but suggests the Nikkei never fell below about 20 P/E. I guess it depends a little on earnings timescales used.

To figure out how the two countries' outcomes might compare, it would seem useful to look at measures like total stock market earnings as a percentage of GDP, total stock market dividends as a percentage of GDP, yields, etc, so as to speculate where US equities might go based on Japan's experience. Of course I've seen useful stuff like this but it doesn't tell the whole story.

Any thoughts on this stuff or knowledge of how to find this kind of data? Okay some quick extremely rough calculations suggest the Japanese stock market cap (TOPIX) is around 70% of GDP. That seems roughly in line with the current US stock market capitalization so maybe intervention and stimulus has a chance to overpower fundamentals...?

 
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Aha! Well my limited searches so far haven't turned up any good data on Japanese earnings and dividends pre and post 1990 (it would make a useful input to understanding what could happen to US earnings).

However, I did run into this which references some measures like the stock-market-cap-to-GDP one I just suggested...

And just to be clear, what I'm interested in is the medium term level at which US markets might stabilize in a "least bad" scenario -- it seems clear to me that in the next couple months/years the downside risks are still big.

 
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