• Median P/E is the P/E in the middle, meaning there are 250 companies out of 500 that have a higher P/E and 250 that have a lower P/E. Using the median number eliminates the effect that a few very richly valued companies have on the average P/E, which is what you normally see reported in the media and presentations.
• The red line in the lower section shows you how P/Es have moved over time.
• The green dotted line is the 52.8 year median P/E. So a P/E of 17 is the historical “fair value.” Simply a point of reference.
• You can see that over time the red line moves above and below the dotted green line.
• If you remove the 2000–2002 period (the “great bull market”), we currently sit at the second most overvalued point since 1964. (Note: 1966 marked a secular bull market high, to be followed by a bear market that lasted from 1966 to 1982.)
• In the lower section of the chart you also see the labels “Very Overvalued,” “Overvalued,” and “Bargains.”
One last comment on the chart. At the very bottom of the chart, Ned Davis states that the market is now 7.9% above the level at which it is considered to be overvalued.
• That means the market would need to decline from the March 31 S&P 500 Index level of 2362.72 to 2176.07 to get back down to the “overvalued” threshold.
• It would need to decline to 1665.72 to be get to “fair value” (the median). That’s a drop of 29.5%.
• Also note “undervalued,” which we could see in a recession (now -51.1% away).