Is the Market Expensive?

Is the Market Expensive?


  • 24 Jul 2020

Is the stock market expensive? Many are watching the Nifty PE ratio and thinking that it is back at 28-30 levels that have witnessed many stock market tops. However in the Sensex the most important stock market bubbles like the Harshad Mehta bull market and the Technology bubble of 1992 and 2000 ended at a P/E ratio closer to 35. To add to that look at the chart of the Nifty Midcap 50 PE chart and what you see is a move from the 2012 low of 10 to a 2018 high of 100, and now a recent low of 15 in March 2020. We are now just above 20. Is that expensive or cheap. Relative to the recent past it is down and to the prior period higher. In the end the PE was best described by a friend and fund manager as the 'Perception of Earnings'. It is that reason why people end up paying even an average of 100 for the underlying stocks. So what can PE ratios be at tomorrow or one year down the line. Today the ration is a function of reduced earnings after the pandemic. So even at a lower Nifty it may appear to have a higher PE. The PE ratio is also a function of peoples expectations of returns. If interest rates fall to a level unseen in the past, investor expectations of returns go down allow for PE expansion. This is because people pay more for even a smaller rate of return. This is against conventional wisdom that a higher PE reflects a higher return potential. That formed the basis of the PEG ratio. if the PE is greater than the growth in the stock you are overpaying. But if return expectations are lower than growth you will overpay. This is as Crazy as it gets, and makes it difficult to justify which and what PE is right for the market. At this point Elliott wave analysis tries to study the behavioral aspect of the markets fractal to a clue on market direction. [data courtesy trendlyne.com]

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