Earlier this month I posted a brief article that highlighted the historic correlation between Inflation and the Cyclical P/E10. The article featured a scatter diagram to illustrate the correlation between inflation and market valuation. The usual market chart shows the chronology on the horizontal axis. A problem with this scatter chart is that it excludes the timeline. Excel does offer the ability to connect the dots and thus show the chronology. But when there as many dots as in this chart, the lines have limited value.

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The next chart addresses the problem in part by adding different colored lines to two market cycles:

• From the low in 1920 that was followed by Roaring Twenties to the 1932 bottom, which encompasses the Roaring 1920s and Crash of 1929
  
  
• From the low in 1982 to the low in 2009, which includes the Boomer Bull Market, the Tech Bubble and recent Financial Crisis

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Even here, the number of dots, especially in the longer Boomer cycle, makes the sequence confusing in spots. So I've created a second version showing quarterly P/E10 ratios without the interpolated monthly values. I've also included start and end callouts to lead the eye.

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I highlighted these two sequences because, well, they're interesting to compare. The key similarity between the two is that both started at secular lows when the cyclical P/E ratio was in the single digits. Otherwise the differences are more striking.

• The earlier cycle was impacted by dramatic periods of deflation. The modern cycle enjoyed an extended period of low inflation.
  
  
• With the 1932 low following the Crash of 1929, the P/E10 returned to where it had been at the beginning of the cycle. In contrast, the low of the modern cycle, March 2009, had a P/E10 only slightly below the historic average valuation.