I often hear people say the stock market is cheap. Many times this is based on a simple assumption--if prices are a lot lower then they were a few months ago they must be cheap. There was a lot of talk about how cheap financial stocks were back in early September--right before they crashed. One method that can be used to determine if stocks are cheap is the price-earnings ratio (P/E). You can look at the chart below and decide for yourself, are stocks cheap?
If you take a close look you will notice that the market tends to get extremely overvalued at the peak of bull markets and extremely undervalued at the end of bear markets.
Chart Source
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