davelj –
Thanks.
I tend to agree that investors are not accounting for risk properly in recent years (one look at sub-prime mortgage market tells us that). Certainly, a decline in earnings and subsequent shunning of stocks by investors could result in the scenario you laid out.
Modest increases in interest rates, economic slowdowns and earnings recessions are likely to come our way at some point and result in a change (decline) in stocks.
However, by one simple measure, stocks have reverted to the mean. According to Bob Brinker …
S&P 500 P/E as of beginning of May * : 16.1
50-year average of S&P 500 P/E : 16
(* Forward-looking P/E assuming 5% earnings growth from actual 2006 levels)
