To hear some bears tell it, stocks have much farther to fall before their prices reflect their true valuations.
Not everyone thinks so, however.
Richard B. Hoey, chief economist and chief investment strategist at Dreyfus Corp., New York, said stock prices are about where they should be, when compared with interest rates. Mr. Hoey is among those who think comparing today's price-earnings ratios with historical ratios doesn't paint the whole picture, or even an accurate partial picture.
"We believe that historical averages of past stock market valuation are less useful as market indicators than stock market valuation measures that adjust for the level of interest rates," Mr. Hoey wrote in an April 16 market commentary. "Most stock market valuation measures that adjust for the level of interest rates tend to classify the stock market as fairly valued or undervalued at current levels."
For example, some bears say the stock market must return to p/e multiples of the early 1980s in order to be fairly valued. But Mr. Hoey said today's p/e multiples are about where they should be, given that 10-year government bond yields are lower now than they were in 1981.
The 10-year government bond yield was 16% in 1981. Today it's about one-third of that. Does that mean price-earnings ratios can be three times as high as they were in 1981? Maybe not.
"We agree with the optimists' view that stock prices have fallen to valuations that are favorable in the context of the low interest rates which currently prevail," Mr. Hoey wrote. The hard part is weeding out the companies whose profit-challenged status is more of a long-term problem. "Not all stocks deserve to rebound."
And speaking of rebounding, what about the economy? In an interview, Mr. Hoey said the country's economic downturn is about half over. He expects the "borderline recession" to continue through the summer, but sometime after Labor Day, the economy should resume its expansion. He said when it's all over, both those who predicted a soft landing and those who predicted a full-scale recession will both have evidence to back up their claims.