No. of Recommendations: 7

Mauldin and Easterling conclude that "The critical factor is to notice that at the start of each bull cycle the markets had single-digit P/E ratios, with no exception. No secular bull market has ever begun with high P/E ratios, even though there have often been significant rallies from high P/E ratios. The lesson of history is that all periods of high valuations came to an unhappy end."

So what's the status of today's market valuation? Well, Standard & Poor's is calling for S&P 500 core earnings to reach $52.60 for 2004. With the S&P 500 currently near 1140, that's a P/E of 21.7. History suggests that's nowhere near low enough to fuel a sustained bull market.

From that perspective, the market's rally since the October 2002 lows can be seen for what it really is: a bear market rally. Mauldin reminds us, "Even in secular bear markets, the stock markets rise in 50% of the years." After three consecutive down years from 2000-2002, the odds were on the bulls' side in 2003. But going forward, odds and history favor the bears.


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