Summary

The Price/Earnings Ratio is touted as a means of predicting stock price movement.

The Price/Earnings Ratio Has No Value in Predicting Future Stock Movement.

A stock price crash may be coming but the currently inflated S&P 500 P/E Ratio is meaningless.

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The price/earnings ratio, or "P/E ratio", is the current price of one share divided by the earnings per share of the company. Over the years, a lot of financial advisors and market gurus have pointed to this number as a method by which to determine whether a company's share price will rise or fall. Others look at the P/E ratio as a way to determine whether stock indexes are susceptible to a big downturn.

If the ratio is low, some claim that a company's stock valuation is "safe" and share prices are likely to rise. In contrast, if the ratio is high, they say share prices are likely to fall. That seems simple and intuitively sound doesn't it? A nice simple idea like that always excites people. Other gurus decided to expand on it. They applied the idea to the broad indexes of stocks, coming up with a P/E ratio for the broad stock market, most often using the S&P 500. According to them, if the ratio of the S&P 500 is "dangerously high", stock prices are "susceptible to a bear market." Conversely, when ratios are low, they believe that the market will rise. Unfortunately, it isn't true.

Many people asked me how I managed to accurately predict that Donald Trump would win the Presidential election a week ahead of time. In response, I wrote an article. I explained that the insight didn't come from having a 6th sense. It was merely a result of careful observation of gold price manipulation. Manipulation isn't rocket science. However, it takes time to explain. I didn't have the space then, and don't have it now. If you want to learn how the banksters move markets up and down for fun and profit, read the novel "The Synod".  In the last paragraph, I mentioned that the Obama administration has helped create the biggest financial bubble in human history. This triggered an unhappy comment from one of my readers, who assumed I was talking about an impending crash in stock prices.

I was actually talking about the bond market, which has a value several orders of magnitude larger than the stock market. But, his comment raised some issues that beg clarification. The commenter insisted that stocks cannot crash because the S&P 500's current P/E ratio is not historically high. It is true that, at slightly over 25 to 1, the S&P 500's P/E ratio is not now inside astronomical territory. It is simply a bit on the high side from a historical perspective. Still, history also tells us that crashes don't need astronomical P/E ratios. Prior stock market crashes have occurred with very modest ratios, even much lower than the one that we have now.

Thankfully, for stock investors, it doesn't matter. The ratio is useful only for evaluating the ability of a company to pay a dividend, and for nothing more. That doesn't mean stocks aren't about to crash, but it also doesn't mean that they are. The P/E ratio has no predictive ability, whatsoever, when it comes to the future of stock prices. It never has. Never once, in all the history of the S&P 500, has an extraordinarily high P/E ratio been required before a major price decline. Just the opposite!

For example, the decline in stock prices at the beginning of the so-called "Great Recession" began in Fall of 2007. The S&P 500 P/E ratio was only a bit over 19 to 1! By January 2009, one year and four months later, stocks declined a lot. In spite of that, the P/E ratio had still risen to about 71! That's when the fastest decline began (between January and mid-March 2009). The key point is that the 71 to 1 ratio in January 2009 was not a result of rising stock values. It occurred because most investors fell behind the curve. They hadn't dumped stocks vigorously enough to force prices down all the way yet. Earnings had simply fallen faster than stock prices, but stock prices were already in a bear market!

When the dot.com bubble started to burst, back in March, 2000, the S&P 500's P/E ratio was a bit over 28 to 1. By August 2003, in spite of stocks having dropped by a huge amount, the P/E ratio was 26.57. Again, investors had fallen behind the curve. Another classic example was at the beginning of the Great Depression of the 1930s. In the late 1920s, the Federal Reserve flooded dollars into the economy in a foolish attempt to assist the British central bank in managing a floundering post-war British pound. With a massive increase in the money supply, American business artificially boomed.

The so-called "Roaring 20s" were an era created by the central bank, in which earnings and dividend payments increased quickly. Every investment seemed to pay off. Stock prices followed suit, but not in excess of the rise in company earnings. Like today, people dreamed about getting rich quick trading stocks. Earnings were so good that by January 1929, the S&P 500 P/E ratio was only a bit under 17.76. That was in spite of skyrocketing stock prices. By October, 1929, however, the P/E ratio still stood at 17.83. By February 1933, when stock prices had finally fallen to about 10% of their value in 1929, the S&P 500 P/E ratio was 14.88! Here is the bottom line... in spite of the 90% decline in stock prices, the P/E was not very different from when prices were 900% higher!

What does that tell you, my friends? Many may now be wondering, by now, how this is possible? Most of your adult life, or at least that part of your adult life during which you've been listening to propaganda from talking heads at CNBC, University Professors, as well as articles by writers at Marketwatch and the Wall Street Journal, you've been told that P/E ratios matter. They do matter, just not to whether a stock is about to go up or down. They matter with respect to the ability of a company to pay you a certain level of dividends.

With respect to everything else, forget all about this nonsense with P/E ratios. It just isn't true. In a perfect world conceived in unrealistic economic theory, the P/E ratio might matter. That's because in a stable economy, earnings would be a measure of how well run a company is. But, we don't have an economy like that. What we have are central banks, controlled by a small cabal of banksters, who determine bull and bear markets, by flooding money in and draining money out. The efficiency of company management is a factor, but a small one, when you compare it to the overall financial conditions created by this manipulative activity. Thus, the P/E ratio has no predictive value.

Unfortunately, we live in a world of booms and busts, instigated primarily by the expansion and contraction of the money supply. Earnings, like stock prices, react to the money supply. When the money supply rises, and interest rates go up, earnings go up and so do stock prices. It may be temporary and artificial but that is what happens. You can complain about it, and you should. But, for now, it is what it is. It's as simple as that. That's why P/E ratios don't matter. They cannot predict individual share prices in the future, and they certainly cannot predict whether or not a bull or bear market is on the way.

The reason is that the average earnings of all companies ALWAYS go up when a central bank increases the money supply. Its got nothing to do with the quality of the management team. The decisions of the central bank and the government are the primary things that will determine whether stock prices crash or continue upwardly bound. Here are the relevant questions. After they've printed the money, do they raise rates significantly? If so, there will be a crash. Do they constrain liquidity? If so, there will be a crash. Do they close their loan windows? If so, there will be a crash. How big the crash will be is determined by how big the preceding bubble was.

What if they never raise rates, constrain liquidity or close loan windows? The ultimate result of that is a collapse of the currency itself. That's because to keep a boom going you not only can't significantly raise interest rates, but you've also got to keep the money spigot open and flowing. That equals a sudden loss of confidence, eventually, at some point in time. The amount of time it takes to collapse is primarily determined by how clever and believable the countering propaganda is.

In practical terms, going forward, if the Federal Reserve allows interest rates to rise significantly, it won't matter whether the S&P 500 P/E ratio is high or low. Earnings will fall. P/E ratios will rise unless stock prices drop in line with earnings. But, humans are slowed down by inherent inertia. And, on top of that, governments and central banks always issue propaganda designed to stop non-well-connected investors from selling. In other words, there is often delay involved, because investors are typically behind the curve.

Don't get me wrong. This doesn't mean stock prices are about to crash. It simply means that the P/E ratio has no value in predicting future price movements. Most important, however, is not to assume it's safe to buy stocks now simply because P/E ratios are not in the stratosphere. That fact will do nothing to stop a crash. That's why, in my opinion, the safest bet right now are precious metals and mining companies. The reason is explained in more detail here.

To avoid confusion over what the P/E ratio was on what date, and to put everyone on the "same page", I have attached a detailed table, setting out the historical P/E numbers for the S&P 500, on the dates I have discussed in this article, at the very bottom of this article. It has been drawn from Dr. Robert Schillers excellent work on irrational exuberance.

PRICE/EARNINGS RATIO OF THE S&P 500 INDEX STOCKS
(Source: Schiller, Robert "Irrational Exuberance")

Date Value

11-25-16 25.46 (estimate)

Oct 1, 2016 24.53

Sep 1, 2016 24.82

Aug 1, 2016 24.98

Jul 1, 2016 24.72

Jun 1, 2016 23.97

May 1, 2016 23.81

Apr 1, 2016 23.97

Mar 1, 2016 23.39

Feb 1, 2016 22.02

Jan 1, 2016 22.18

Dec 1, 2015 23.74

Nov 1, 2015 23.67

Oct 1, 2015 22.68

Sep 1, 2015 21.45

Aug 1, 2015 22.15

Jul 1, 2015 22.40

Jun 1, 2015 22.12

May 1, 2015 21.92

Apr 1, 2015 21.42

Mar 1, 2015 20.96

Feb 1, 2015 20.77

Jan 1, 2015 20.02

Dec 1, 2014 20.08

Nov 1, 2014 19.75

Oct 1, 2014 18.50

Sep 1, 2014 18.81

Aug 1, 2014 18.68

Jul 1, 2014 18.96

Jun 1, 2014 18.88

May 1, 2014 18.46

Apr 1, 2014 18.35

Mar 1, 2014 18.48

Feb 1, 2014 18.06

Jan 1, 2014 18.15

Dec 1, 2013 18.04

Nov 1, 2013 18.15

Oct 1, 2013 17.86

Sep 1, 2013 17.88

Aug 1, 2013 17.91

Jul 1, 2013 18.12

Jun 1, 2013 17.80

May 1, 2013 18.25

Apr 1, 2013 17.69

Mar 1, 2013 17.68

Feb 1, 2013 17.32

Jan 1, 2013 17.03

Dec 1, 2012 16.44

Nov 1, 2012 16.12

Oct 1, 2012 16.62

Sep 1, 2012 16.69

Aug 1, 2012 16.14

Jul 1, 2012 15.55

Jun 1, 2012 15.05

May 1, 2012 15.22

Apr 1, 2012 15.70

Mar 1, 2012 15.69

Feb 1, 2012 15.37

Jan 1, 2012 14.87

Dec 1, 2011 14.30

Nov 1, 2011 14.10

Oct 1, 2011 13.88

Sep 1, 2011 13.50

Aug 1, 2011 13.79

Jul 1, 2011 15.61

Jun 1, 2011 15.35

May 1, 2011 16.12

Apr 1, 2011 16.21

Mar 1, 2011 16.04

Feb 1, 2011 16.52

Jan 1, 2011 16.30

Dec 1, 2010 16.05

Nov 1, 2010 15.88

Oct 1, 2010 15.90

Sep 1, 2010 15.61

Aug 1, 2010 15.47

Jul 1, 2010 15.72

Jun 1, 2010 16.15

May 1, 2010 17.30

Apr 1, 2010 19.01

Mar 1, 2010 18.91

Feb 1, 2010 18.91

Jan 1, 2010 20.70

Dec 1, 2009 21.78

Nov 1, 2009 28.51

Oct 1, 2009 42.12

Sep 1, 2009 83.30

Aug 1, 2009 92.95

Jul 1, 2009 101.87

Jun 1, 2009 123.32

May 1, 2009 123.73

Apr 1, 2009 119.85

Mar 1, 2009 110.37

Feb 1, 2009 84.46

Jan 1, 2009 70.91

Dec 1, 2008 58.98

Nov 1, 2008 34.99

Oct 1, 2008 27.22

Sep 1, 2008 26.48

Aug 1, 2008 26.83

Jul 1, 2008 25.37

Jun 1, 2008 26.11

May 1, 2008 25.81

Apr 1, 2008 23.88

Mar 1, 2008 21.81

Feb 1, 2008 21.74

Jan 1, 2008 21.46

Dec 1, 2007 22.35

Nov 1, 2007 20.81

Oct 1, 2007 20.68

Sep 1, 2007 19.05

Aug 1, 2007 18.02

Jul 1, 2007 18.36

Jun 1, 2007 17.83

May 1, 2007 17.92

Apr 1, 2007 17.48

Mar 1, 2007 16.92

Feb 1, 2007 17.49

Jan 1, 2007 17.36

Dec 1, 2006 17.38

Nov 1, 2006 17.24

Oct 1, 2006 17.14

Sep 1, 2006 16.77

Aug 1, 2006 16.67

Jul 1, 2006 16.61

Jun 1, 2006 16.82

May 1, 2006 17.46

Apr 1, 2006 17.77

Mar 1, 2006 17.80

Feb 1, 2006 17.80

Jan 1, 2006 18.07

Dec 1, 2005 18.07

Nov 1, 2005 18.01

Oct 1, 2005 17.64

Sep 1, 2005 18.44

Aug 1, 2005 18.72

Jul 1, 2005 19.00

Jun 1, 2005 19.00

May 1, 2005 18.93

Apr 1, 2005 19.02

Mar 1, 2005 19.84

Feb 1, 2005 20.11

Jan 1, 2005 19.99

Dec 1, 2004 20.48

Nov 1, 2004 20.05

Oct 1, 2004 19.25

Sep 1, 2004 19.35

Aug 1, 2004 19.03

Jul 1, 2004 19.51

Jun 1, 2004 20.17

May 1, 2004 20.14

Apr 1, 2004 21.23

Mar 1, 2004 21.62

Feb 1, 2004 22.46

Jan 1, 2004 22.73

Dec 1, 2003 22.17

Nov 1, 2003 23.15

Oct 1, 2003 24.75

Sep 1, 2003 26.42

Aug 1, 2003 26.57

Jul 1, 2003 27.65

Jun 1, 2003 28.60

May 1, 2003 28.24

Apr 1, 2003 28.05

Mar 1, 2003 27.92

Feb 1, 2003 28.46

Jan 1, 2003 31.43

Dec 1, 2002 32.59

Nov 1, 2002 32.03

Oct 1, 2002 29.24

Sep 1, 2002 28.89

Aug 1, 2002 31.53

Jul 1, 2002 32.46

Jun 1, 2002 37.92

May 1, 2002 41.41

Apr 1, 2002 43.81

Mar 1, 2002 46.71

Feb 1, 2002 44.57

Jan 1, 2002 46.17

Dec 1, 2001 46.37

Nov 1, 2001 43.62

Oct 1, 2001 39.72

Sep 1, 2001 36.90

Aug 1, 2001 37.85

Jul 1, 2001 35.46

Jun 1, 2001 33.67

May 1, 2001 32.02

Apr 1, 2001 27.96

Mar 1, 2001 26.10

Feb 1, 2001 27.81

Jan 1, 2001 27.55

Dec 1, 2000 26.62

Nov 1, 2000 26.90

Oct 1, 2000 26.50

Sep 1, 2000 27.34

Aug 1, 2000 27.97

Jul 1, 2000 28.05

Jun 1, 2000 28.16

May 1, 2000 27.49

Apr 1, 2000 28.50

Mar 1, 2000 28.31

Feb 1, 2000 27.76

Jan 1, 2000 29.04

Dec 1, 1999 29.66

Nov 1, 1999 29.74

Oct 1, 1999 28.66

Sep 1, 1999 29.99

Aug 1, 1999 30.89

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GREAT DEPRESSION ERA STATISTICS

Feb 1, 1933

14.88

Jan 1, 1933 17.29

Dec 1, 1932 16.63

Nov 1, 1932 16.40

Oct 1, 1932 16.18

Sep 1, 1932 17.96

Aug 1, 1932 15.69

Jul 1, 1932 10.22

Jun 1, 1932 9.35

May 1, 1932 10.40

Apr 1, 1932 11.63

Mar 1, 1932 14.75

Feb 1, 1932 14.19

Jan 1, 1932 14.07

Dec 1, 1931 13.84

Nov 1, 1931 16.23

Oct 1, 1931 15.30

Sep 1, 1931 16.90

Aug 1, 1931 19.04

Jul 1, 1931 18.86

Jun 1, 1931 17.56

May 1, 1931 17.48

Apr 1, 1931 18.66

Mar 1, 1931 19.92

Feb 1, 1931 18.90

Jan 1, 1931 17.00

Dec 1, 1930 15.99

Nov 1, 1930 16.29

Oct 1, 1930 16.59

Sep 1, 1930 18.39

Aug 1, 1930 17.62

Jul 1, 1930 16.98

Jun 1, 1930 16.68

May 1, 1930 17.87

Apr 1, 1930 18.19

Mar 1, 1930 16.51

Feb 1, 1930 15.38

Jan 1, 1930 13.92

Dec 1, 1929 13.29

Nov 1, 1929 12.94

Oct 1, 1929 17.83

Sep 1, 1929 20.19

Aug 1, 1929 19.67

Jul 1, 1929 18.86

Jun 1, 1929 17.43

May 1, 1929 17.34

Apr 1, 1929 17.32

Mar 1, 1929 17.66

Feb 1, 1929 17.60

Jan 1, 1929 17.76