By Douglas Ramsey, Leuthold Group CIO
PUBLIC BUYING HIGH… AGAIN?
Three years ago, the lowest (normalized) S&P 500 P/E ratios since 1984 proved insufficient to get the public interested in buying in stocks, but fortunately things have changed. Stocks are beginning to look expensive—and nothing else has proven more reliable a predictor of public stock market participation than high prices.
• Dating back to the inception of monthly mutual fund flow data (1954), investors have consistently bought stocks at P/E ratios three to five points above the levels they’ve eventually sold them. This momentum-oriented behavior appeared obvious
during the technology boom and subsequent collapse. But the same behavior was observed decades before a “.com” was appended to any company name. For example, from 1954 through 1979, monthly net inflows occurred with the market at a median normalized P/E of 17.7x—five points above the P/E level in months of net outflows!
•Since 1980, months of net equity fund inflows have occurred at an even higher median normalized P/E level of 20.1x. [This later willingness to “pay up” might be seen as consistent with the era of conspicuous consumption, dating from about the mid-1980s
to September 15, 2008 (fall of Lehman).]
•The S&P 500 closed March at 20.4x 5-Yr. Normalized EPS—finally nosing above the 20.1x median valuation level for inflows since 1980. I project April will at last see net
inflows. These flows are, of course, showing up too late to secure attractive long-term returns. But they might help power the last leg up to meet the 2007 high.