A rally to remember

September 9, 2009

Deutsche Bank has published some interesting research putting the recent equity market rally over the past six months in historical context, showing that the only comparable six-month gains occured during the 1930s.
During the last six months the S&P 500 has risen 51 percent, while BBB corporate bond spreads have rallied 228 basis points, both one in 200 events, according to Deutsche

The analysts also make some good points on current equity market valuations:

The interesting point to note is that on a Shiller P/E valuation method (ie using real adjusted 10-year rolling average earnings to adjust for the business cycle), the 1933 rallies started with a P/E of between 5-8 and ended the 6-month period between 12-14. This rally started with a Shiller P/E ratio of 12 (the highest in the study) and we now stand at around 18.

And add:

Most of the prior rallies found valuations still historically low at the end of the 6-month period. On a Shiller P/E basis this rally leaves us historically on the expensive side now.

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