China’s stock market has fallen sharply over recent weeks despite measures by officials in Beijing aimed at calming investors’ jitters and shoring up global confidence in the country’s slowing economy. For example, in the year 2000 the average S&P 500 Index P/E Ratio went to 30, which was followed by a stock market crash that saw the NASDAQ lose 75% of its value and the S&P 500 Index lose 45% of its value. The thing that is tricky about the average stock market P/E Ratio valuation method is that during different eras investors are willing to pay more or less for stocks, based on other forces than just reported company earnings. To counter this fault in the average stock market P/E Ratio, investors take a look at the average S&P 500 Index PEG Ratio. As a stopgap measure many businesses began cutting their workers’ hours and wages.
For example, during periods of high growth, investors may be willing to buy stocks even when the average stock market P/E Ratio is well above 15, because the earnings growth outlook is so good that they assume the earnings part of the equation will catch up to the price part of the equation. I put some money into a mutual fund around the last stock market bottom in March 2009, and it has done quite well.
The average S&P 500 Index PEG Ratio = Stock Price / Earnings Over The Past Year / Expected Annual Earnings Per Share Growth Rate. Of course, earnings expectations can be and often are wrong, especially when the economy goes from growth to recession, so it is important to also look at the advanced stock market valuation methods outlined in the following section to get a sense as to whether the risk of a stock market crash is high and defensive moves may be warranted. The following are some advanced stock market valuation methods that should be considered when evaluating whether the stock market is overvalued and whether the potential for a stock market crash is high.
Investor Sentiment is a reading of how many investors are bearish (think the stock market will decline) versus how many investors are bullish (think the stock market will increase). Market bottoms and tops have historically been marked by excessively bearish investor sentiment (bottoms) and excessively bullish investor sentiment (tops). When Investor Sentiment is excessively bullish, it is time to consider whether a stock market crash may be looming. This ratio is also known as the Total Market Cap to Gross Domestic Product (TMC:GDP) Ratio. This is different from the missions before as there is no rival stock to buy into.
The Ratio of Total Market Cap (TMC) Relative to the United States Gross Domestic Product (GDP) is stock market valuation gauge that is one of the best indicators of whether the stock market is undervalued or overvalued at any given point in time. To calculate this ratio, you simply take the total market capitalization of the all the stocks in the stock market and divide it by the latest reported total GDP for the United States. This gauge is useful to get out of the stock market ahead of a crash because economic downturns usually cause stock market sell-offs, and occasionally stock market crashes. The Paris Bourse , now part of Euronext , is an order-driven, electronic stock exchange.