John Hussman has more comments this month on the use of earnings to value stocks. But I would particularly point out the following aside:
It should be clear from all of our valuation work over recent years that our valuation estimates were constructive in 2009. The problem was not valuation, but the fact that similar valuations in the Depression were followed by a further two-thirds decline in the market, and measures of market action that were quite useful in post-war data were relentlessly whipsawed in Depression-era data.
I expect that this syndrome will be seen again in the not-too-distant future as valuations go to the bargain basement, perhaps to extremes that won’t be seen again for another hundred years. BTW, this week’s Economist has a nice historical piece on five financial crises.