Stocks zoomed to new highs on reasonably good news for the U.S. economy and the Bank of Japan’s announcement of quantitative easing.
Just a few weeks ago markets were plunging, and analysts writing on the nation’s most prestigious financial pages cautioned that stocks were historically overvalued.
On October 15, I wrote in the Washington Times: Don’t Panic, Stocks Will Rebound
The S&P, which accounts for about 80 percent of the publically traded shares in the United States with a price-earnings ratio at 18.68 is still trading below its 25 year average of about 18.90. And estimated earnings for the next 12 months indicate a P/E rato of only 16.65.
I have written that the fundamentals of capital formation and stock market valuations have changed, and indicate stocks are capable of maintaining a much higher P/E ratio than that historical average going forward.
Going forward, expect more volatility—but don’t panic!
Next time you read in the Wall Street Journal stocks are overvalued and your broker calls, indulge in an earthly pleasure, go to bed and call the professor in the morning.
Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and a national columnist.