Trader Michael Liloia, right, works on the floor of the New York Stock Exchange Friday, June 1, 2012. The stock market suffered its worst day of the year Friday after a surprisingly weak report about hiring and employment cast a pall of gloom over the U.S. economy. (AP Photo/Richard Drew)
Richard Drew, AP
If history is an indicator, the greatest stock market crash in history is coming within the next few years, as some observers indicate. I’m not a stock broker, market analyst or fortune-teller. I’m not a short-seller, options dealer or a doomsday believer. I won’t make any money by what I’m about to tell you. I’m an auditor by day, monitoring risks and threats to my clients, and I’m a preparedness expert by night, hoping for the best but preparing for the worst.
So take what you read here with a grain of salt. Don’t believe a word I write because no one is responsible for your financial future except you. I’m not going to tell you what to do with your money or try and sell you on anything. But if you have any money invested in the stock market, a 401(k) or an IRA, you may want to factor into your retirement decisions market conditions that some observers indicate a bad picture for the stock market.
Price-to-earning ratios are at historic highs. Meaning, they are in a bubble and prime for a correction.
Price-to-earnings ratios are considered by almost all market analysts as the No. 1 indicator for the value of a stock. A P/E ratio is the price of a stock per share divided by the earnings per share. If you’re an investor, the P/E ratio can be directly converted to how many years it would take for a company to earn enough profit per share to buy a single share. Anything below a 10 means the stock is undervalued. Between 10-15 is fair value, above 15 is overvalued and anything above 20 means we are in a bubble and it’s about to burst , that is, the stock price is about to fall.
“Markets fluctuate up and down like a balance seeking equilibrium” says Mike Maloney, president of goldsilver.com. “The higher it goes, the lower it sinks.” Over the past 120 years, we've seen P/E ratios in the S&P 500 soar above 20 on four different occasions. Each time it rose above 20, it subsequently dipped below 10, meaning the stock index crashed. The Great Depression saw P/E ratios at 35 and then fell to 5 within a few short years. We currently sit around 25, an indication of the bubble zone. Facebook’s P/E ratio at IPO on May 18 was almost 100 and the stock price quickly fell, and is still falling.
Dividend yields are at historic lows.
The dividend yield is a way to measure how much cash flow you are getting for each dollar invested. In other words, how much "bang for your buck" you are getting from dividends. It’s a financial ratio that shows how much a company pays out in dividends each year relative to its share price (dividends per share/price per share). Companies must increase dividends to attract buyers. The higher the yield, the more attractive it gets.
