By Skyline On Friday, September 01 st, 2017 · In

FIELD NOTE: SEPTEMBER 2017

TIME TO SELL? P/E MAY BE MISLEADING.

Lately rising P/E ratios have garnered quite the media hype.

Calculated as a stock's price divided by its earnings, P/E ratios can be a useful tool to determine if a stock is overpriced or undervalued. Investors are taught to buy when the P/E ratio for a stock is low in comparison to its competitors and sell when the P/E ratio is comparatively high. While there are many means by which investors can evaluate stocks, the P/E ratio, and its derivative the PEG, have been made popular due to their simplicity and famous proponents.

S&P 500 Annual P/E Ratios

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However, while the P/E ratio tells you what people are currently paying for a given stock (or stocks), it neglects to predict when the next bear market will strike. The average P/E ratio since 1870 is 15.67. As of August 25th, the S&P 500 P/E ratio was 23.53. High? Yes; but is it time to sell? Even the experts are conflicted regarding the rising P/E ratios. Some argue that regardless of the recent bull run, higher P/E ratios are here to stay.

At Skyline we subscribe to the words of Warren Buffett, a famous proponent of the P/E ratio, who said earlier this year, "If there's a game it's very good to be in for the rest of your life, the idea to stay out of it because you think you know when to enter it –is a terrible mistake."

Ask your advisor how you can wisely invest in the current market, regardless of potential market growth or recession.

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