The market has been generally sinking since January. The new administration's "hurry up" offense has consumers and businesses very off balance. This off balance is slowing consumer spending and encouraging businesses to hold off many expansionary activities until the dust settles.
This environment, in my opinion, is likely to affect average price earnings ratios. I am looking for them to move down. While different industries can have generally higher or lower price earnings (PE) ratios, the long term (20 to 30 years) average for the PE overall is around 15. Many companies have had PE's in the 30's and higher. These elevated PE's have been the "norm" for the last 5 to 7 years. PE's reflect the market's anticipation of growth. A low PE is reflecting lower expected growth and a high PE is reflecting higher growth.
Just as a refresher, PE's are a relative value measurement. The P is the stock's price and the E is the yearly earnings of the stock. It shows how much a market participant is willing to pay for a given amount of yearly earnings relative to the perception of the company's ability to grow. For the buyer of a stock, lower is usually better, unless you anticipate very high growth in the stock's earnings.
All this said, I think we're looking at the market generally moving to lower average PE's. Earnings will likely decrease or not grow as much and prices will drop reflecting earnings growth expectations. IMO this is a junction that it is even more important to NOT overpay when making a stock purchase. The price you pay is always critical to long term success. It's almost impossible to get the lowest price, but if you make a purchase on the lower side of things, you'll be better in the long term.
Be smart, be well-read, be aware and be successful.
“Time is the friend of the wonderful company, the enemy of the mediocre.” Warren Buffett
