Economists Suggest Recession Is Over

Most top economists believe recession is over. Hooray!...? The stock market must be "safe" now! Everybody go move all your money back the stock market. Not so fast.

This announcement shouldn't affect your decisions at all. The time to take advantage of economic recovery has passed. This is how it always is -- by the time people realize economy has recovered, it is too late to take advantage of it.

Yet, irony of ironies, many people will see this as a sign to get back in the stock market after they sold out near the low. Then they sweated out that 50% gain. Whew.

Is the stock market still on sale?

I don't think so. History agrees with me. Historically, the average price to earnings ratio (PE ratio) of the stock market is about 12-15 depending on what time range you use. The PE ratio basically measures the enthusiasm for the stock market. The higher the ratio, the more people generally expect profits to increase. As a result, the stock market becomes more expensive relative to profits.

When the PE ratio goes below the average, investing in the stock market tends to give above average returns. When it goes above the average, the stock market tends to do below-average returns. For example, the price earnings ratio of the stock market got into the single digits in the late 70s and that was a great time to invest money. Also, in the late 90s the PE went over 40 and that was a terrible time to invest. Earlier this year the PE was about 10 to 11.

Right now the PE of the market is about 14. This is the US stock market only, but it is not the only measure of the market generally. However, I do think it is the best. If you want to use the S&P 500, it's about 15.5.

Considering peoples' opinions of the stock market are pretty low right now, I would say a 14 to 16 PE ratio of the stock market is about as high as I expect it to go for quite some time.

So, is the stock market unsafe?

If you're investing for any long-term goal, such as retirement, then the stock market is a fine investing tool. However, by comparison to earlier in 2009, the stock market is less safe. In other words, you'd be paying significantly more for approximately the same product. Therefore, the change that you will lose money, your risk, is higher now.

What should investors do?

Keep investing as usual. Now might be a good time to rebalance your portfolio if stocks have overweighted it.

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