The comments below are taken from John Hussman's most recent weekly market commentary. I agree with his opinion.
September 13, 2010
John P. Hussman, Ph.D.
Overall then, we are facing the likelihood of a fresh near-term deterioration in U.S. economic activity, as part of a longer multi-year adjustment, which is typical post-credit crisis behavior. My impression is that Wall Street is eager to treat the present cycle as a "V-shaped" recovery. We see little evidence to support that view, and the best evidence we do observe is more consistent with a double-dip (if not a continuation of a single ongoing recession).
The most serious risk
Yet, even the near-term risks to employment and the economy are not the greatest risks that investors face. Rather, the most serious risk for investors here is the persistent and misguided eagerness of Wall Street to value long-term assets based on short-term earnings results. Investors have priced the S&P 500 in a manner that is far too dependent on the achievement and maintenance of profit margins about 50% above historical norms. This is a mistake. Profit margins normalize over time, and on the basis of normalized earnings, the S&P 500 is about 40% above robust historical valuation norms (and even further above valuation levels that have represented "generational" buying opportunities such as 1974 and 1982, when well-covered corporate dividend yields averaged about 6.7%, versus the current 2%).