Even after a nerve wrecking government shut down, the US market still continues its bull run.
The Dow currently trades at around 17 times earnings , while the S&P trades at around 18 times earnings. Small cap stocks (Russell 2000) are trading at a ridiculous 80+ times earnings!!
Why does PE ratio matters so much?
For example you purchase a small hot dog stand business for $1000, it generates $100 in earnings for you per year. That's a price/earning ratio of 10 times.
If it's earnings doesn't grow, 10 times earnings is probably quite a fair price for your $1000 investment. (given a rate of return of 10%)
If the hot dog business can grow its earnings by 10-20% a year, say making $115 the next year and $130 the year after and so, you might wanna pay up to 15 times earnings or $1500 for this business right?
The ......