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Is the stock market crazy — or just giddy?

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William Cline is going against the grain. Cline, a well-known economist, isn’t convinced that the stock market is wildly overvalued. That’s an increasingly lonely view.

“Warning Signs Mount as Stocks Stumble,” the Wall Street Journal headlined this week. “Investors are running out of reasons to keep buying U.S. stocks, exposing a growing number of warning signs,” the Journal wrote. The most commonly cited are high P/E ratios, meaning the relationship between stocks’ prices (the P) and their profits or earnings (the E). A June survey of investment managers by Bank of America Merrill Lynch found that 84 percent felt U.S. stocks were the most overvalued in the world.

Going back to 1936, the average P/E for the reported earnings of the Standard & Poor’s 500 stocks has been about 17, notes Howard Silverblatt of S&P. Recently, the P/E has been about 24. Some tech companies have especially high P/Es.

Not so fast, says Cline in a short paper for the Peterson Institute, the Washington think tank where he works. Statistical........

© Washington Post