The 2011 article P/E: Future On The Horizon by Advisor Perspectives contributor Ed Easterling provided an overview of Ed's method for determining where the market is headed. His analysis was quite compelling. Accordingly I include the Crestmont data to my monthly market valuation updates.
The first chart is the Crestmont equivalent of the Cyclical P/E10 ratio chart I've been sharing on a monthly basis for the past few years.
The Crestmont P/E of 23.4 is 70% above its average (arithmetic mean) of 13.8. This valuation level is similar to the 67% we see in the latest S&P Composite regression to trend update and higher than the 42% above mean for the Cyclical P/E10 (more here).
The Crestmont P/E of 23.4 puts the current valuation at the 96th percentile of this fourteen-decade series.
Because inflation is a key driver for direction of P/E multiples, I occasionally update this chart twice a month if the mid-month release of the Consumer Price Index marks a significant change in the annualized rate of inflation.
For a better understanding of these charts, please see Ed's two-part commentary here:
- What "Secular Cycle" Means
- Nightmare on Wall Street: This Secular Bear Has Only Just Begun
- Game Changer: Market Beware Slower Economic Growth