“More new graphs and a look at if we can use them as a sensible guideline for the future! Remember it’s the combination of indicators that are important rather than individual ones—however compelling! ”
Over that last month or so we have been busying ourselves with the construction of a comprehensive way of monitoring market conditions - hence the numerous charts that have appeared over the last few weeks— well we’ve still got some left to show you! Over previous weeks we looked at the PE ratio (price divided by earnings per share) and this time we have used it in a slightly different way.
We looked at 25 of the largest companies in the FTSE-100 and their average PE ratio over 10 year periods; we then included the potential dividend yield and the potential effect of the current PE ratio reverting back to its mean allowing us to construct an indicator of potential returns over subsequent years - this current suggests returns may be around average.
It is of course interesting to see where we are in relation to history, but as with any hypothesis you need to test it! Below is the same graph but with returns for the subsequent 3 years per annum overlaid - this is inverted as it makes it easier to read, as you can see current levels suggest a possible satisfactory outcome in the order o 7% or so per annum (around average), however there have clearly been better times to commit fully to equities (2003, 2009 and 2012).
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