January 24, 2018

On Wednesday, the S&P 500 was down 0.1% and Toronto was down 0.5%.

CN rail was down 2.1%. Stantec was down 1.5%, Toll Brothers was down 1.5%.

CRH Medical has continued to recover and was up 3.0%.

U.S. stocks have kept going up despite P/E ratios that are quite a bit higher than historical averages. But of course low interest rates support high P/E ratios.

Consider that “the competition” is a 10 year Treasury that currently yields 2.65%. A 2.65% yield is a P/E of 37.7 AND the E or distribution is never going to rise over the ten year holding period. From that point of view it could be argued that the S&P 500 at some 24 times trailing GAAP earnings is still by far the better bet especially considering that the E on stocks does tend to grow. Treasuries are considered risk free and WILL mature at par value.

Interest rates are rising. But it’s very hard to say how high they will go.

I’ve generally been unwilling to assume that stock P/Es will stay above 20 or even 18 in the long run but it is always possible that they could. In order to push P/Es below 20 it may take ten year yields rising closer to 5% or some big global shock. The other threat to stocks would be a lower E due to recession. In the U.S., there appears to be no sign of recession.