Recently, Apple has made headlines for being the first US listed company to hit the 1 trillion market cap. Looking towards the indices, the S&P 500 is close to hitting its all-time high (2,840 vs 2,872), after a short pull-back early this year. As an investor, I became curious about the P/E ratio of the index, so I looked it up.
The current P/E ratio is 24.47 vs a a mean of 15.71 and a median of 14.71. The past few times the P/E ratio was this high was before the global financial crisis, the early 2000s recession and dot-com bubble, and the early 1990s recession.
The US market currently looks overpriced to me. However, we have to remember that high prices can go higher, and low prices can go lower. The high P/E ratio does not mean that there will be a recession coming soon, but we have to be prepared for all situations. What will we do if the market continues to go up? What will we do if the market goes down?
After looking at the US market, I took a look at Singapore’s market. The current P/E ratio of the SPDR STI ETF is 11.56 and the P/B ratio is 1.13. To me, this means that the Singapore market is not currently overpriced, and the reason is probably because the STI has been moving sideways for the past few years, while the S&P 500 has been going up.
What Can We Do About This?
During my research, I came across an interesting investing strategy by Morgan Housel. He came up with this after studying the US stock market’s history from 1928.
|Market falls by this much||Invest this much||Historical frequency|
|10%||10%||Every 11 months|
|15%||22%||Every 24 months|
|20%||30%||Every four years|
|40%||12.5%||Every few decades|
|50%||12.5%||2-3 times per century|
This is a strategy where the investor ‘nibbles’ at the stock or ETF so that he does not over commit to the market at any time. This ensures that the investor does not ‘catch a falling knife’, but the drawback is that he may get the opportunity to deploy all his funds if the market drops by a small amount, which leads to ‘cash drag’. This is also a strategy that times the market, and there are different schools of thought regarding this.
Take note that this strategy is based on the US market, and may not work in other markets. This is also his investment strategy, and may not be suitable for you.
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