The thinking behind mean reversion

 

It implies that prices rise and fall around a true value to which they always return.

“But it is impossible to predict when mean reversion will occur,”

Financial pundits have nevertheless been invoking mean reversion because the S&P 500 has risen by 94 per cent over five years to all-time highs.

US stocks now account for a quarter of the value of the world’s equities.

 The cyclically-adjusted price to earnings (Cape) ratio devised by Professor Robert Shiller tells you how many times stock prices can be divided by average earnings per share, with some adjustment for economic ups and downs.

The number for the S&P 500 is currently around 38 times, not far from a pandemic-era peak of 44 times.

Market doomsayers tend to envisage mean reversion in price/earnings via a drop in stock prices because this would be the doomiest way for it to occur.

But rising earnings could also fulfil the prophecy more positively, via higher earnings. 

I respect brokerage analysts for the invaluable insights they provide. However...  the financial services industry has a weakness for reverse engineering. 

That means starting with numbers that suit your customers and generating calculations to justify them. 

Jonathan Guthrie Financial Times13 November 2024

https://www.ft.com/content/61fbb28b-93d1-48f3-93dc-7669b6a62e69?shareType=nongift

Tillbaka till Rolfs länktips 13 November 2024

https://englundmacro.blogspot.com/2024/11/rolfs-lanktips-13-november-2024.html