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Comment by teambayleaf | Hacker News Reader

Shiller P/E ratio is 24.2 today, which is ... slightly below the level of 2006 before the last recession started (25.6 in 2006.3).

Frankly I won't be surprised even if S&P loses more than 30% from the current price. It is simply not a unthinkable scenario, considering that the historical median of S&P500 P/E is around 16.

* https://www.multpl.com/shiller-pe

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Ironically, prices are higher if growth is expected to be lower.

Population Growth worldwide is expected to be lower. And most people think productivity growth is also going to be lower (harder to predict, this jumps with major new inventions).

As long as interest rates sit at 0, the P/E ratio is not returning to historical norms.

Prices are still 50% above historical norms. They're not falling that far. Retirees and home owners would riot in the streets.

I've also been thinking along those lines - it seems logical to me that if you expect ~7% yearly profit that the P/E ratio should be around 14 (1 / 0.07) and that if the market is very competitive (lots of available capital, low perceived risk, low-yielding alternatives such as bonds) and therefore you expect ~4% yearly profit the P/E ratio should be around 25 (1 / 0.04). However I have never really encountered this explanation anywhere which makes me wonder whether my reasoning is somehow wrong.

The denominator E goes up over time. If ratio is constant, then P also goes up.

Yes I think that makes sense. If you have real economic growth that can cause E to rise and through that mechanism P to rise. But even without economic growth, by reducing expected returns, you can keep E constant and get P to rise by increasing the P/E ratio. My sense is that historically the first mechanism was more important, but in the last 10 years the second played an important role.

>Retirees and home owners would riot in the streets.

Letting prices fall even further ...

Regarding the price development:

Prices will fall, because interest rates at 0 means that it is cheap to fund competition. Competition drives profits down.

Low interest rates have not funded R&D. R&D is at a record low. I imagine this is because perceived growth is low. Physically, a lot of things can't improve a whole lot more from where they are now. We've picked the low hanging fruits of almost every industry.

Improvements are not needed to compete - think mattress stores. Having a better product can be an aid in market entrance, but it is not needed.

They can't riot because coronavirus

Can you explain what is the "Shiller P/E" , and why it matters?

It is a measure of how valuable a company stock is (price-to-earnings ratio) but in contrast to the standard P/E which looks at data for only one year it looks at data for the previous ten years, so it's less volatile.

https://en.wikipedia.org/wiki/Cyclically_adjusted_price-to-e...

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