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Nobody will dispute that the peak in the stock market in 2000 was the equivalent of a financial Mount Everest. Just as Everest is the highest peak in the world, stock valuations in 2000 were higher than at any time in the history of our stock market.

By valuations, I mean to say the price-to-earnings ratio, simply the amount an investor must pay for $1 of earnings. Historically, the price-to-earnings ratio has averaged roughly 15, meaning one must pay $15 for $1 of annual earnings. (As a practical matter, I like to look at an average of the trailing, 5-year earnings.)

In 1999, the S&P 500 price-to-earnings ratio, usually called the p/e multiple, reached a peak at over 36. This is over twice the historical average and higher than every previous peak in the last 100 years… Everest.

Since then, the p/e has declined and it made a bottom in 2002 at around 22. What is interesting is that even at 22, the p/e was still much higher than the historical average of 15.

In fact, 22 is closer to 25, the average peak for every other bull market in the past 100 years. In this light, with the decline in the stock market since 2000, we have successfully descended Everest but rather than return home we’ve only reached base camp.

An interesting aside: base camp for Everest, at 18,250 feet, is still substantially higher than the peak of Mt. Whitney, the tallest peak in the continental U.S. at 14,500 ft.

To get home to a true bottom, we’d at least have to see something closer to the historical average of 15 on the p/e. What’s more worrisom, however, is that the average bear market over the past 100 years bottomed at around a 7.5 p/e.

Anyway you look at today’s p/e, 33 times 5-year earnings and 22 times peak earnings, we’re still a long way from home. And every climber knows that on Everest, even at base camp, life is fleeting.

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