Is the Worst Really Over?

Nobel Prize-winning economist Paul Krugman says the world avoided a second Great Depression. Goldman Sachs’ senior strategies Abby Joseph Cohen is convinced that a new bull market has just begun. Without wanting to sound cavalier, where was her call a few months ago?

The recent batch of news hasn’t been good – just less bad than expected. But is it good enough to assume that the worst is really over?

Employers are still slashing jobs, retail sales are disappointing, corporate revenue (despite cost cutting and stimulus packages) is falling, home prices are far from recovering, foreclosures are rising and expected to continue rising; the list goes on.

Standard and Poor’s reported that the S&P 500′s P/E ratio is currently at 143.95. That’s no typo. Based on earnings as reported over the past several weeks, the P/E ratio truly is 143.95. This is the snapshot of the current reality, not a wishful projection.

Prior market bottoms of historic proportions have seen the P/E ratio drop to the single digits. In fact, no prior bear market has been put to rest unless P/E ratios have reached single digits and thereby reset valuations to reflect rock bottom prices.

This clearly shows that stocks are still overvalued, despite the declines seen since the 2007 market top. What is driving the current rally?