According to Henry Blodget, probably a lot farther:

There were four massive stock bubbles in the 20th Century: 1901, 1929, 1966, and 2000.  During each of these bubble peaks, the S&P 500 neared or exceeded 25X on professor Robert Shiller's cyclically adjusted P/E ratio.*  After the first three of these peaks, the S&P 500 PE did not bottom until it hit 5X-8X.  We're still in the middle of the last one.

The most recent bubble peak, 2000, was by far the most extreme we have ever experienced.  In 2000, the S&P 500 by prof. Shiller's measure exceeded 40X (it had never before exceeded 30X). With the S&P 500 hitting 700 today, the PE has now fallen back to 12X.  (See chart above.)

Three major bubbles are not enough historical precedent to confidently conclude where the S&P 500 will bottom this time around, but it seems reasonable to conclude that the trough will be in line with--or below--the preceeding lows (Given that we just had the highest peak in history by a mile, it doesn't seem absurd to think that we might be headed for the lowest trough in history by a mile.)

So where are we now?

Based on Professor Shiller's latest numbers, we're at about a 12X P/E.  (Prof. Shiller's last update was at 805 on the S&P 500, which produced a 14X P/E.  Plugging in today's 700 on the same earnings number, we get about a 12X P/E).  The 12X PE compares favorably to the long-term arithmetic average of 16X, but it's still way above the historical troughs of 5X-8X.

Incidentally, if you think that people still have a vestigial view of housing as an investment asset rather than a consumption good with residual value, this implies that housing will substantially undershoot as well.  Right now, what consensus there is on the housing market thinks that it will fall just about half again as far as it has fallen, to the historical average.  But if it follows a stock-like pattern, you should see it plunge to about 50% of the historical price-to-rent ratio, which has generally stood around 1.1.  That implies prices well below where they were in the 1990s.

A ratio of 0.55 seems too low, but 0.8 doesn't seem out of the question.  With rents falling, that means housing prices would drop at least another third if they overshoot badly on the downside.

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