From Teeka Tiwari, editor, Jump Point Trader: Since 1870, the market’s average price-to-earnings ratio (P/E ratio) has been 16.7. When it trades below this level, it’s a good indication of value.
[The price-to-earnings (P/E) ratio is a ratio for valuing a company (or companies in an index). It measures current share price relative to its earnings per share.]
In horrible bear markets, the average P/E ratio stays below 16.7. But in secular bull markets, the ratio goes much higher.
The chart below points out where the recent market dip has gone in terms of P/E ratio (from a P/E of 16 down to 14.68).
Last week’s market swoon dropped stocks to some historically cheap valuations. It was the correction I’d predicted (and wanted) for several weeks.
If you missed this buying opportunity, don’t worry… Volatility will remain high in the short run. You’ll have some more opportunities to buy at cheap valuations.
But here’s the most important point you must understand…
We’re in a long-term, secular bull market.
It’s spurred by a demographic shift that will send markets to all-time highs. I call this the “Golden Ratio” (for more on the Golden Ratio, click here to read my special report).
The “millennial” generation is now larger than the baby-boom generation… and millennials are just beginning to enter their “prime earning years.” That equates to prime spending years. Businesses of every sort flourish.
During Golden Ratio periods, the market’s average P/E ratio increases by 130%. When we see this increase, the S&P 500 will be trading at about 22 times earnings.
Based on 2015 earnings estimates, the S&P 500 is trading at 16 times earnings. That’s a 37% discount to the valuation we normally see in a Golden Ratio period.
2016 looks to be even better. Estimates show the S&P 500 trading at 15.2 times earnings… a 45% discount to the Golden Ratio valuation.
Even if valuations don’t rise as high as expected, stocks are still trading at a 4% discount to historical value, using 2015 earnings. Using next year’s earnings, stocks are 9% cheaper.
Bottom line: Stock prices are cheap, and bull markets don’t end when stocks are cheap. Stay long stocks.
Reeves’ Note: Teeka’s Golden Ratio thesis is playing out well for his Jump Point Trader subscribers. They just closed out another triple-digit gain… The stock hit its “jump point” and rocketed 109.41% higher in just 60 days…
Today, we’re reopening a special offer to try out “Big T’s” elite momentum-trading service. Click here to learn more.
Quiz: Did This Stock Go Up or Down?
Below is a picture of a stock’s price chart. Within this chart, there are 3 signals revealing what it’s going to do next…
If you learn how to spot these signals, you can make an absolute fortune in the stock market.
Take a look…
Did this stock go up or down next?