The Wall Street Waltz: 90 Visual Perspectives, Illustrated Lessons From Financial Cycles and Trends, Revised and Updated Edition

Chart 2

In Case You Didn't Get It the First Time

In case you're a skeptic and didn't believe it the first time, this chart gives you a glimpse of P/Es back further than any other chart I've ever seen. We constructed it at my office from Cowles Commission data (1930s Congressional investigation into securities and the causes of the Great Depression). It shows the P/E of the Cowles All Stock Index from 1871 to 1936, which overlaps the preceding graph by 21 years. The chart is a little different in the period from 1915 to 1936 than what you've already seen, but only because the index is a little different—broader and perhaps a bit less volatile than the Dow Jones Industrials. Still, both charts reinforce much the same idea.

First, note that as the market sold above 20 times earnings on only five occasions between 1915 and 1976 (see Chart 1), this chart shows it above 20 times earnings on only four occasions. One was when the earnings disappeared in the 1930s. The market fell, but the vanishing earnings boosted the P/E. (This rare phenomenon also happened in 1982, when the Dow Jones Industrials' earnings vaporized temporarily, and the market, which had plummeted, sold at a whopping P/E of 100 anyway.) This also happened, but to a lesser degree in 1893 and 1894, as shown on this chart, when the P/E peaked at 28. The index fell 22 percent in those years, from 43.5 down to 33.9.

That came as part of what was known as the Panic of 1893, which was part of a worldwide depression (as shown ...