No that isn't a typo, I really do mean undervalued. And extremely is the correct adjective also.
Sometimes a graph just speaks for itself:
So what is this graph ?
It comes from the Institutional Brokers' Estimate System (sometimes written as I/B/E/S) which started in 1976 for US equities and 1987 for international equities. IBES is a huge database that gathers the different estimates of earnings by stock analysts for the majority of U.S. publicly traded companies.
The IBES valuation model compares the 12-month forward estimate earnings yield (earnings/price x 100) of the S&P 500 to the current yield of the 10-year Treasury note.
Lets see how one would have done following its guidance:
- it got you in at the start of the bull market in the 1980's
- it cautioned you just before the crash of 1987
- it flashed a warning again in late 1991
- but it was premature as the market dipped only a little bit and went much higher
- it got you back in in late 1993 which was during the plateau - just before another dramatic liftoff
- it told you to buy again when the market dipped in late 1995 (fantastic!)
- it signalled caution in 1997 which resulted in a sideways trading range 2-3 years
- it repeatedly signalled caution during the bubble years
- it told you to buy again in mid 2002 - almost the exact bottom of the bear market!
- it has remained stubbornly flashing a buy signal ever since
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