Is the market looking forwards or backwards?

If it’s looking backwards, it’s not looking very far…

Shares in the typical UK company cost 15 times median earnings over the last ten years. That looks a pretty fair price, judging by my short run of data which starts close to the peak of the bull market in 2007 and includes the crash of 2008/2009.

Although the economic backdrop seems just as apocalyptic now, worries about solvency having moved on from banks to countries, the market seems much more sanguine.

One explanation is companies remain resolutely profitable, and on the whole recent results from companies in the Thrifty 30 confirm this.

Commercial vehicle hire company Northgate, gift wrap manufacturer International Greetings, lift component manufacturer Dewhurst, modelling and war gaming company Games Workshop, and carpet manufacturer Victoria have all been doing pretty well according to their latest statements. Most of them express reservations about the future due to the tough economic conditions, though.

Perhaps investors are looking backwards at recent profitability and forwards at the seemingly intractable problem of debt in the World’s more mature countries and assuming we will muddle through somehow.

That’s the extent of my analysis, as usual I think it is best to prepare for the worst and hope for the best, by keeping my head down and buying value when I see it.

The median ten year earnings yield is now over 9%, less than 1% shy of my 10% benchmark for value. Not every company on a yield of over 10% will be good value, some of them will be in precarious financial or competitive situations, but I reckon many must be.

That only adds to the frustration I feel at not having found any new companies for the portfolio last month.