Research Note: Historical Valuation Comparisons

March 30, 2020

Over the last few weeks, the DJIA declined significantly. The DJIA price level declined 37% from its peak on February 12, 2020 to the most recent low on March 23, 2020. Valuation measures can give us an idea of how far prices might fall near term by looking at changes in valuation levels in past declines.  My original note about valuation is in: https://marketresilience.blogspot.com/2020/03/update-march-22-2020.html, in the section titled: "The DJIA May Be in the Bargain Basement."

This note provides additional data.

Price-to-Book Ratio Changes in the Great Depression

The Price-to-Book ratio for major market sectors in during the 1930s declined from their highs in 1929 to about 50% of the prior high values by 1930.  This information comes from "The Crash and Its Aftermath: A History of Securities Markets in the United States, 1929-1933," by Barry Wigmore (1985).  The decline took place over a longer time than the recent Corona decline, and there may have been write-downs in book value during that longer period that make this comparison less meaningful.

As comparison, the Price-to-Book ratio of the DJIA declined to 2.9 as of March 22, 2020 from a high of 4.4 just a month earlier. This represents a drop to 66% of its prior high value.

Price-to-Earnings Ratio Changes in 1987

During the 1987 Crash the DJIA price level declined about 30% from August 25 to October 19. I can locate only Price-to-Earnings ratio information for this decline. Over the same time period, the DJIA's Price-to-Earnings ratio had declined to 67% of its prior high value.

This information is from the New York Times. https://www.nytimes.com/1987/11/27/business/economic-scene-taking-a-look-at-p-e-ratios.html

As a comparison, the DJIA Price-to-Earnings ratio declined to 65% of its prior high level from February 12, 2020 to March 23, 2020.


This information suggests that the recent decline has already produced low valuations, low enough by historical standards to attract bargain-hunting investors.  I believe the information in the original note linked above and this additional note is relevant for the immediate time period. Please note that earnings and book values will certainly change (decline) as a result of the pandemic and economic decline. As we start seeing additional deterioration in the real economy, other valuation assessments might be needed to give perspective.

As you know, the MRI-based process does not include valuation information because it is difficult to obtain accurate historical information.  But I do refer to it on a regular basis for market context, especially during times of market stress.