Typical Values of P/E10

My choice for the typical value of P/E10 is 14.

Here are the numbers.

P/E10 Numbers

Professor Robert Shiller includes P/E10 in his S&P500 data.

Professor Robert Shiller’s Web Site
Professor Robert Shiller’s Data

I have thinned his data. I use his January values.

Here are the MEDIANS and AVERAGES for selected time periods.

AVERAGES

1881-1975 15.2
1881-1980 14.9
1881-1985 14.6
1881-1990 14.6
1881-1995 14.9
1881-2000 15.7
1881-2005 16.2

1921-1975 15.0
1921-1980 14.5
1921-1985 14.1
1921-1990 14.2
1921-1995 14.5
1921-2000 15.7
1921-2005 16.5

MEDIANS

1881-1975 15.6
1881-1980 15.4
1881-1985 14.8
1881-1990 14.8
1881-1995 15.3
1881-2000 15.5
1881-2005 15.6

1921-1975 13.9
1921-1980 13.5
1921-1985 13.0
1921-1990 13.3
1921-1995 13.8
1921-2000 14.4
1921-2005 15.6

AVERAGES and MEDIANS

If asked for a single number, report an AVERAGE P/E10 value of 16. This is reasonably accurate for both the modern era (1921-2000 or 1921-2005) and the extended era (1881-2000 or 1881-2005).

To calculate an AVERAGE, you add a series of values and divide by the number of values. To calculate the MEDIAN, you select the middle value: with half of the values being larger and half of the values being smaller.

I prefer to use the MEDIAN since it reduces the influence of outliers. An extraordinarily large value can have an undue influence on an AVERAGE. It will have a minimal effect on the MEDIAN.

However, when the data are well behaved, the AVERAGE is more efficient statistically. The AVERAGE is also known as the MEAN.

Most of the time, when I analyze data, I use values of P/E10 from the years 1921-1980. (Typically, I limit my analysis to 1923-1980. Typically, 1921 and 1922 are outliers.)

Both the AVERAGE and MEDIAN levels of P/E10 show the influence of the longest and strongest bull market. Today’s valuations are still on the high side. They are gradually declining. We can expect both the AVERAGE and the MEDIAN to decline as well.

When asked for a single number, I prefer to use a P/E10 value of 14.

When making my stock returns calculator, I excluded partially completed sequences. For 10, 20 and 30 year returns, I used data from 1921-1975. I started in 1921 to reflect the recent era. For longer sequences (40, 50 and 60 years), I had to go back to 1881 in order to have a sufficient number of data points. The MEDIAN value of P/E10 in 1921-1975 was 13.9.

This too is consistent with using P/E10 = 14 as a typical value.

Have fun.

John Walter Russell
June 22, 2006