Some say they are very cheap, and the market is about to reach bottom in the next couple of months.

But is it true?

In historical terms (20 years, 50 years, 100 years), stocks are far from cheap.

S&P 500 P/E over the last 82 years

S&P 500 P/E over the last 82 years

Current PE ratio for the S&P 500 index, using as-reported earnings per share over the trailing 12 months, is 18.1, more expensive than 80% of the months over the last 138 years.

[S]tock market’s current valuation is not abnormally low right now, much less even below average. If you have been basing your bullishness on the belief that it is particularly low, then you need to rethink your bullishness.

The market is now approaching the 50-year average of 17:

Regardless of whether you take the 50 year or the 132 year perspective, the theory of Reversion to the Mean implies that stocks are likely to become cheaper so as P/Es revert. And one should not expect the market to stop at fair value, as we have seen, the tendency is to overshoot on both sides.

So, if it’s still expensive, and going down, and it will overshoot, then how low will we go?

One measure, Tobin’s Q ratio, developed in 1969 by Nobel Prize-winning economist James Tobin, shows the Standard & Poor’s 500 Index is still too expensive relative to the cost of replacing assets. History suggests the ratio must sink further as deflation sets in. The S&P may plunge another 55% to 400 by 2014.

And two years ago Bronson Capital Markets Research suggested a model indicating a bottom P/E of 8, with the reversal happening somewhere in the next decade:

Bronson Capital Markets Research, March 13, 2006

Bronson Capital Markets Research, March 13, 2006

And the Four Year Cycle (or the Presidential Markets Cycle) could tell another story for the short-term. This cycle sees markets bottom in the 2nd year of a president’s mandate, and peak in the 4th year. It would mean at least another couple of years of downturn.

The Four Year Cycle

The Four Year Cycle

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