Obama ventures a guess on value in the stock market

This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.

U.S. presidents usually don’t try to give investing advice on the stock market. But President Obama opted to take a stab at it today.

‘What you’re now seeing is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal, if you’ve got a long-term perspective on it,’ Obama said at the White House while meeting with British Prime Minister Gordon Brown.

Blue-chip stock indexes dived Monday to their lowest levels in 12 years amid another wave of fear over prospects for the economy and financial system. The market fell again today, albeit modestly, with the Standard & Poor’s 500 index easing 4.49 points, or 0.6%, to 696.33 -- the first close below 700 since 1996.

Assuming Obama was referring to price-to-earnings ratios, the projected P/E on the S&P 500 now is 10.8. That’s based on an S&P tally of analysts’ estimates of operating earnings (profit before write-offs) for 2009.

Compared with recent history, that is a fairly low P/E. The average P/E on the S&P 500 index based on operating earnings is 19.3 over the last two decades, according to S&P.

But because data on operating earnings only go back to 1988, that average P/E is skewed by the market bubble years of the late-1990s, when P/Es were vastly inflated.

By contrast, measuring earnings including write-offs, the S&P 500 P/E is about 21.5 based on 2009 estimated results. Stocks don’t seem nearly as cheap by that measure, particularly when you consider that in the late-1970s -- a period of sustained stress in the economy and financial system -- many big-name stocks never were valued at higher than a single-digit P/E.

In any case, the problem with all earnings estimates for this year is that they could turn out to be way too high, if the economy fails to stabilize. If earnings are a lot worse than projected, then P/Es would be a lot higher -- and stocks may not be the kind of ‘good deal’ that Obama suggests in referencing ‘profit and earning ratios.’

It’s also dangerous to talk to investors about the ‘long-term’ at this point, with the S&P at its lowest since 1996. Many people who trusted the buy-and-hold mantra over the last 10 years have nothing but losses to show for it. Obama risks sounding like a broker.

Lastly, I’m sure his comments will only aggravate investors who believe that the administration’s policies are at least partly responsible for the stock market’s dive this year.

-- Tom Petruno