SAN FRANCISCO — Price-to-earnings ratios, a popular measure of how expensive stocks are by historical standards, have surpassed lows seen in recent recessions. But that’s no guarantee they won’t sink further.
“There’s no doubt that people can look at market valuations and determine that stocks are relatively inexpensive — but that doesn’t mean they’re going to quit going down,” said Michael Gibbs, director of equity strategy at Morgan Keegan & Co. in Memphis, Tenn.
The price-to-earnings ratio of stocks in the S&P 500 has sunk to 10.6 from nearly 17 at the end of 2007, says FactSet Research. That’s based on the Thursday close of the S&P 500 compared with index members’ past four quarters of operating earnings, or net income excluding what analysts consider to be extraordinary charges and gains. Thomson Reuters, which publishes a similar analysis, estimates the trailing P/E ratio for the S&P 500 is around 11.
Those numbers are well below the valuations reached during the market low of the 2001 recession, when the ratio stopped at 19.
They’re also lower than the P/E ratio of 13 that was touched at the market bottom during the 1990-91 recession, says Morgan Keegan, which used data compiled by Yale University’s Robert Shiller for its historical research.
But widen out the lens, and P/E ratios dropped even further in some earlier recessions. During the market low of the early 1980s, recession, for example, stocks in the index were trading at a mere 8 times earnings.
“There have been periods when the market multiple (P/E ratio) traded lower. And the economy is declining at a rapid pace, meaning earnings could fall more,” Gibbs said.
On Friday, the S&P 500 and the Dow Jones industrial average ended the day as they started it, with a short rally that pushed the indexes into the positive.
Led by materials and health care, the S&P 500 ended 0.8 point, or 0.1 percent, higher at 683.38 points, while the Dow industrials gained 33 points, or 0.5 percent, to close at 6,626.94.
The Nasdaq Composite closed 5.7 points, or 0.4 percent, lower at 1,293.85 points, the lowest close since March 2003.
The indexes had spent most of the day in the red after rising early on a February jobs report that wasn’t as bad as some had feared. The U.S. Labor Department said nonfarm payrolls shrank by 651,000 in February, slightly higher than economists had expected but lower than the 750,000 to 800,000 some market participants had feared.
Going into the weekend, traders positioned themselves for more bad news out of Detroit.
General Motors Corp. shares skidded 22 percent lower to close at $1.45, with the component of both the Dow and S&P 500 touching a new 75-year low earlier in the day.
“Language coming from GM is that bankruptcy is becoming more of a potential event,” Morgan Keegan’s Gibbs said. “That’s spooking the market.”
