Many observers dismiss, or at least question, the market’s rise since around 2013 as mere “multiple expansion.” That means the prices of stocks have risen disproportionately to underlying earnings, and either prices must decline or earnings must catch up in order to return to some normal or historically average PE multiple.
In a recent blog post, serving as the latest installment of “stockbroker economics,” Barry Ritholtz argues that all bull markets involve multiple expansion. (We accept Andrew Smithers’ definition of stockbroker economics – 1. All news is good news. 2. It’s always a good time to buy stocks.)
Using a chart from Mark Lehmann at UBS, Ritholtz asserts that all bull markets consist of rising PE multiples. The chart also shows PE rising overall in recent decades. The implication (it’s not really a fully formed argument) is that those who distrust the market rally of recent years as mere multiple expansion don’t realize that all bull markets involve multiple expansion.
There’s multiple expansion and there’s multiple expansion
It seems reasonable and not that surprising that all bull markets involve multiple expansion. But what would make Rittholtz’s post more complete is if it asked what kind of expansion is reasonable and what kind isn’t. For example, using the Shiller version of the market multiple, is the PE moving from single digits, or from 10 to 20? Or is it moving from 20 to 30? Or is it moving to 44 as it did in the late 1990s? Investors should want to know that, but Ritholtz doesn’t mention it.
Perhaps Ritholtz thinks all prices are “random walks” and that nobody can say what is a reasonable price to pay for stocks and what isn’t. But he doesn’t say that, and the reader is left wondering what he thinks about that important question. Does the market get prices right, and deliver inflation-beating returns to long-term investors over, say, every 10-year period? We don’t know from reading the post.
