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How Now, Which Way Dow?

By March 11, 2013CMF Blog

With the headlines this week of the Dow Jones Industrial Average breaking its 2007 high, we intuitively thought that the PE ratio for the Dow would be 20-25% lower than it was during the “irresponsible” period that was the 2007 boom. Instead, we were a bit surprised by the results, included in the table below. 

Price-to-Earnings Ratio

2007

2013

Dow Jones Industrial Average

16.99

15.87

S&P 500

15.2

13.5

Source: ReutersInvestor Place 

It seems as though money is now coming off of the sidelines to push the Dow index upward, providing a much needed boost to confidence while Washington languishes. Still, if the velocity of the sidelined dollars into the stock market increases, prices will soar. The question in my mind is will the anxiety of an elevated price-earnings ratio coupled with our history of financial crashes provides a good antidote to unmitigated exuberance? 

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