A Time to Buy Put Options?

I note this, from Tobias Adrian and Michael Fleming:

we present a table listing attributes of the fifteen largest bond market selloffs since 1961. The three selloffs highlighted in this post—1994, 2003, and 2013—are ranked fifth, ninth, and thirteenth, respectively, and are highlighted in blue. Beyond reporting figures behind the earlier discussion, the table shows the change in the ten-year, zero-coupon yield and in the spread between the ten-year and three-month yields between the start of each selloff and the maximum selloff date. Of note, the recent episode and 2003 are instances in which the yield spread moved almost as much as the ten-year yield itself (that is, the three-month yield rose little), explaining the importance of the term premium in those cases.

Pointer from Mark Thoma.

and this, from John Mauldin.

The Shiller P/E is now 24.4, about the same level as August 1929, higher than December 1972, higher than August 1987, but less extreme than the level of 43 that was reached in March 2000 (a level that has been followed by more than 13 years of market returns within a fraction of a percent of the return on Treasury bills – and even then only by revisiting significantly overvalued levels today). The Shiller P/E is presently moderately below the level of 27 at the October 2007 market peak. It’s worth noting that the 2000-2001 recession is already out of the Shiller calculation. Moreover, looking closely at the data, the implied profit margin embedded in today’s Shiller P/E is 6.3%, compared with a historical average of only about 5.3%. At normal profit margins, the current Shiller P/E would be 29.

3 thoughts on “A Time to Buy Put Options?

  1. The historical P/E comparison needs to be put into context against the prevailing interest rate environment. When that is done, P/Es don’t look relatively high.

  2. Buying stocks at such a high P/E indicates people think that companies will be able to go on making profits, indeed to increase those profits, for many years.

    The zero interest rate environment indicates people think there will be very little growth this year, with future years not being much better.

    Both these views could be wrong; one could be right; both cannot be right.

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