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Showing posts from August, 2017

Will the Real Price-to-Earnings Ratios of the Stock Indexes Please Stand Up?

The price-to-earnings ("P/E") ratio remains one of the most widely-accepted valuation metrics in the financial markets today.  However, it is not without its flaws.  For a price-to-earnings ratio to exist, a company must have positive earnings.  Therefore, companies that are losing money have no earnings and a nonsensical "infinite" P/E ratio.  Major financial firms that produce market indexes, like FTSE, Russell and iShares, exclude these firms when calculating their index price-to-earnings ratios.  However, this could have significant consequences in indexes that have a large number of companies with no earnings, by making the overall index P/E look artificially low.  Take, for example, the small cap Russell 2000 index.  Almost a third of companies in the small cap index are losing money (i.e., have no earnings).  Global financial firms FTSE and iShares are both reporting the Russell 2000's P/E currently at around 20.  However, as head of gl

Womack Weekly Commentary: August 28, 2017

Womack Weekly Commentary August 28, 2017 The Markets Hope floats. Optimism about possible pro-growth economic policies, including tax reform and deregulation, helped U.S. stock indices finish higher last week, reported Barron’s . It wasn’t all smooth sailing, though. Stocks bobbed up and down as investors’ optimism was weighted by concerns about a possible debt-ceiling battle and government shutdown. CNN offered some insight to the historic economic impact of government shutdowns on productivity: “The last time the government was forced to close up shop – for 16 days in late 2013 – it cost taxpayers $2 billion in lost productivity, according to the Office of Management and Budget. Two earlier ones – in late 1995 and early 1996 – cost the country $1.4 billion.” For investors, it’s important to distinguish between a shutdown’s potential effect on the U.S. economy and its possible impact on U.S. stock markets. A source cited by The New York Times re