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WHY P/E IS USELESS

26/11/2025

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Why is the notorious P/E ratio useless? Simply because it fails when you need it most.

S&P 500 PE Ratio - 90 Year Historical Chart

Think of it:

In 1929, the P/E ratio could not have warned you before the stock market crash.
Ditto in 1937.
There was no strong 'sell' signal in 1968 when it was needed.
In September 1976 it would have falsely told you that stocks were still cheap.
In December 1991 the market looked expensive. It wasn't.
Another false warning came in 1998.
The P/E correctly signalled an extremely expensive market in 2000-2001, but it didn't tell you the recovery was on the way in 2002.
No 'sell' signal in October 2007.
Worse yet, no 'buy' signal in March 2009.
Since March 2009, many investors underperformed the index as they mistakenly believed the market was 'expensive by historical standards'. Again, it wasn't.

It's just time to ditch the P/E. The Shiller's P/E (or Cyclically Adjusted P/E) is no better.

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is the dow cheap or overpriced now?

25/11/2025

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Is it a good idea to adjust stock market indices to inflation? Well, why not. However, there's a glitch. The most usual inflation measure -- the Consumer Price Index -- is an awkward tool for this purpose. Asset prices should not be conflated with consumer prices. Equities are assets, consumer goods are not.

Discounting asset prices with the CPI is methodologically wrong. Do not expect any meaningful results if you combine the CPI inflation with equity prices, corporate earnings et cetera.

Is there a better approach? Yes. Using monetary inflation -- or money supply growth -- is the correct way to go. In other words, the question is "how would the stock market index look like if money supply remained constant?" (It's money supply, not consumer prices what matters to investors.)

The answer to the above question is as follows -- and it's a surprising chart indeed!

The takeaway of this exercise is, among others:

The 1929 bubble was a huge event, something that was never heard of before or after 1929.
During the post-war period, reversion to the mean is clearly visible.
Interestingly, the present-day monetary-inflation-discounted value of the Dow is pretty much in line with the long-term normal. No bubble, to be specific.
The 2000 bubble was very similar to that of 1937, with the aftermath being alike, too.
The best years to buy cheap stocks were 1933, 1984, and 2009.

If you look at the stock market through the inflation-adjusted optics, your perception of reality will never be the same as before. As if your doctor prescribed you the right glasses to correct your impaired vision.

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The US Stock market, Inflation Adjusted

12/11/2025

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This is the most comprehensive US stock market index adjusted for inflation. The inflation is defined as the growth of liquid money supply (MZM, Money Zero Maturity aggregate.)

Is the market overpriced or cheap? Make your own conclusion.

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WHY P/E IS USELESS

is the dow cheap or overpriced now?

The US Stock market, Inflation Adjusted

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