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What Stock Market Volatility

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by Felix Salmon
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Jan 24 2008 12:00am EDT

What Stock Market Volatility?

The WSJ has a great little interactive feature today - or at least it would be great if it didn't start talking at you the minute you opened it and every time you click on a new tab. Turn your speakers off first!

In any case, the graph above shows the S&P 500, in red, against the S&P's p/e ratio, in yellow. Turns out that the p/e ratio has been as flat as Kansas for well over three years, in fact trending downwards slightly even as the market was hitting new highs last year. A bubble this ain't.

This graph can be seen as a cause for optimism: there wasn't irrational exuberance in the stock market of late, and it seems that if there is a pullback in corporate earnings - as you can see at the end of 2001 - the p/e ratio has no problem spiking upwards in response.

(Via Gaffen)

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