Why Does The Proper Price Per (PER) Change?

Why Does The Proper Price Per (PER) Change?

As a U.S. economist, it is a historical data representing the change in PER from 1871 to 155 years of the spx index, a large U.S. stock 500 index brought from the site.

This PER fluctuates in cycles of as long as 50 years and as short as 30 years, sometimes undervalued for more than 10 years and sometimes overvalued for a long time.

Why is that?

That is because of the relative value of the stock price.  

A company with a 10% return on equity has no value if it has a 12% deposit rate. Deposits are safe and give high returns, but stocks are not and have relatively low returns. Therefore, despite high performance, market prices are lower than performance. Conversely, if the deposit rate is 2%, 10% of equity capital will be at a high level even at the risk, and the stock price will inevitably be higher than performance. The value of stocks is not determined by performance itself, but by comparison to other safe-revenue investment instruments.

Inflation determines these interest rates. Therefore, if inflation is strong, the stock price falls even if performance increases, and the valuation decreases, and if inflation stabilizes and low interest rates are maintained, the stock price can rise and the valuation level can rise even if performance does not improve.

The valuation is now at the highest level in 155 years of history in the unprecedented interest rate situation of zero interest rates. Stable prices and zero interest rates have increased valuations amid the strong dollar, but US interest rates are now unlikely to fall as in the past along with inflation. In addition to climate factors, inflation is inevitable due to China's economic stimulus, anti-globalization, and supply chain disruptions.

In this regard, the U.S. valuation, which remains at a historical high, is likely to change in the direction of lower valuation, at least for 15 years, which is half of the next short cycle. In other words, even if a company's performance improves, the stock price can move in a downward direction.