Another CAPE milestone breached - 26

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Browser
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Another CAPE milestone breached - 26

Post by Browser »

December 23, 2013: The Shiller PE/10 valuation metric has now exceeded 26. Do I hear 27? Going once...going twice....
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Re: Another CAPE milestone breached - 26

Post by dh »

Thanks for the post. I went to a webpage that graphs PE10. From the graph it appears that PE10 was greater than 26 in three periods ending in 1929, 1999 and 2007. In reference to your implied question: yes, PE10>=27 is possible, yet <26 is a possibility too. So, I stay the course. :sharebeer
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Re: Another CAPE milestone breached - 26

Post by TheTimeLord »

Browser wrote:December 23, 2013: The Shiller PE/10 valuation metric has now exceeded 26. Do I hear 27? Going once...going twice....
Wake me at 30.
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Re: Another CAPE milestone breached - 26

Post by Browser »

Even Shiller has said he'll start worrying when it hits 28. There are two possibilities: it goes to 28 it doesn't go to 28 because the price goes nowhere from here. When you come to a fork in the road, you should take it, said Yogi Berra.
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Re: Another CAPE milestone breached - 26

Post by MnD »

25.7 if you update the E time series with third quarter 2013 earnings. 8-)

1-Sep-03 47.96
1-Aug-03 46.44
1-Jul-03 44.93
will be replaced with values roughly twice these.
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Re: Another CAPE milestone breached - 26

Post by jocdoc »

the pe ratio is only 50% predictive of future returns
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Re: Another CAPE milestone breached - 26

Post by Ged »

Why this particular fascination with integers? Is it some sort of cognitive or cultural bias that integers should be considered more important than other numbers?

Really there are not very many of them compared to the other numbers.
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Re: Another CAPE milestone breached - 26

Post by Leeraar »

Ged wrote:Why this particular fascination with integers? Is it some sort of cognitive or cultural bias that integers should be considered more important than other numbers?

Really there are not very many of them compared to the other numbers.
If I am in Europe, in Celsius it is a much lower number. To paraphrase Winston Churchill (on Cambodia), I never heard of it and at this stage of my life I am not going to worry about it.

L.
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Re: Another CAPE milestone breached - 26

Post by Browser »

Ged wrote:Why this particular fascination with integers? Is it some sort of cognitive or cultural bias that integers should be considered more important than other numbers?

Really there are not very many of them compared to the other numbers.
Integers make better milestones than fractions and decimals, IMO. Who ever heard of reaching the "milestone" age of 100.3 for example?
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Re: Another CAPE milestone breached - 26

Post by TheTimeLord »

Browser wrote:
Ged wrote:Why this particular fascination with integers? Is it some sort of cognitive or cultural bias that integers should be considered more important than other numbers?

Really there are not very many of them compared to the other numbers.
Integers make better milestones than fractions and decimals, IMO. Who ever heard of reaching the "milestone" age of 100.3 for example?
How about 26.2?
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Re: Another CAPE milestone breached - 26

Post by Leeraar »

Browser wrote:Integers make better milestones than fractions and decimals, IMO.
You are very rational. :wink:

L.
Last edited by Leeraar on Mon Dec 23, 2013 9:40 pm, edited 1 time in total.
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Re: Another CAPE milestone breached - 26

Post by nedsaid »

We had the great Boglehead Bond Panic with intermediate term bonds down 2-3%, TIPS down 8-9%, and foreign bonds down maybe 4-5%. Many threads about Bogleheads worried about rising interest rates. A few sold their bond funds.

With the US Stock Market up 30% or so this year, it is time to start a Boglehead stock panic. Making so much money in 2013 is a crisis of monumental proportions. And 2013 isn't done yet!! So who is going to be first going 100% to cash?

(My tongue is firmly planted in cheek).
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Re: Another CAPE milestone breached - 26

Post by Leeraar »

nedsaid wrote:We had the great Boglehead Bond Panic with intermediate term bonds down 2-3%, TIPS down 8-9%, and foreign bonds down maybe 4-5%. Many threads about Bogleheads worried about rising interest rates. A few sold their bond funds.

With the US Stock Market up 30% or so this year, it is time to start a Boglehead stock panic. Making so much money in 2013 is a crisis of monumental proportions. And 2013 isn't done yet!! So who is going to be first going 100% to cash?

(My tongue is firmly planted in cheek).
Ned,

http://etfdailynews.com/2013/12/09/spdr ... ng-waning/

In an astounding piece of insight, we learn:
Remember that gold prices fell this year because demand was lower.
Yes! The flight to equities will end soon!

Personally, I am running out of tongues and cheeks.

L.
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Re: Another CAPE milestone breached - 26

Post by nedsaid »

In all seriousness, I have been buying bonds like crazy and mildly rebalancing from stocks to bonds. But the stock market has been so strong that my asset allocation has hardly budged. I am taking advantage of a rebalancing opportunity that I missed in 2007. I kicked myself for not rebalancing after the financial crisis hit in 2008. I don't want to repeat that mistake again.

So if you want to be cautious about the stock market now, I don't blame you.

But stock prices are rising because there is more demand for stocks.;) If the money flows rotate one way, they could just as easily rotate the other way.

(I know, I know. A very lame attempt at humor. I should leave this up to the comedy professionals.)
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Re: Another CAPE milestone breached - 26

Post by MoonOrb »

Thanks for the update! Still planning on sticking with my plan!
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Re: Another CAPE milestone breached - 26

Post by TheTimeLord »

nedsaid wrote:In all seriousness, I have been buying bonds like crazy and mildly rebalancing from stocks to bonds. But the stock market has been so strong that my asset allocation has hardly budged. I am taking advantage of a rebalancing opportunity that I missed in 2007. I kicked myself for not rebalancing after the financial crisis hit in 2008. I don't want to repeat that mistake again.

So if you want to be cautious about the stock market now, I don't blame you.

But stock prices are rising because there is more demand for stocks.;) If the money flows rotate one way, they could just as easily rotate the other way.

(I know, I know. A very lame attempt at humor. I should leave this up to the comedy professionals.)

I bought I Bonds for the emergency fund and International Index in the IRA this week. Wasn't the 10 yr about 4.75%-5% in 2007?
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Re: Another CAPE milestone breached - 26

Post by Caduceus »

Are these P/E ratios adjusted for widespread changes in generally accepted accounting principles? Especially with regard to the earnings portion. It used to be that goodwill had to be amortized; now goodwill can only be tested for annual impairment but not revalued upwards. Also, companies used to artificially inflate earnings by not counting stock options as an expense. Over a long enough time period, the cumulative earnings are the same (net of the tax deferred assets created), but surely that has some effect on the way the historical P/E curve looks.
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Re: Another CAPE milestone breached - 26

Post by czeckers »

Let's see, I've been buying bonds, developed and emerging international, and REITs all year. Certainly no worries about buying US stocks with a high PE. Ah the beauty of rebalancing -- thank you Bogleheads.

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Re: Another CAPE milestone breached - 26

Post by TheTimeLord »

czeckers wrote:Let's see, I've been buying bonds, developed and emerging international, and REITs all year. Certainly no worries about buying US stocks with a high PE. Ah the beauty of rebalancing -- thank you Bogleheads.

-K
Sounds like you are a frequent rebalancer. How often do you rebalance?
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Re: Another CAPE milestone breached - 26

Post by Browser »

I am planning to change the title of this thread to: "Another milestone breached - 26.11". :?
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Re: Another CAPE milestone breached - 26

Post by Longtimelurker »

I put CAPE into the same bucket as avoiding stepping on the third base line on the way to the pitchers mound. Or praying to Joe-Boo for home runs. Its an interesting metric, massively skewed by a black swan event. It is currently only predictive if the next ten years has a similar event in store for us as '08-'09. If not, then its a worthless metric. So which of you CAPE believers is going to sign up for a black swan in the next ten years? Takers?

Its the same as the cult of PP folks who don't even bother posting here anymore since their 25% allocation to gold is down 30%, and their 25% allocation to long term bonds is down double digits.

Its all patterns in the snow fall. Good luck with that.

Full disclosure: I have spent all year buying international, emerging markets, and bonds. I had 2 major rebalances, and I am ending 2013 at 75.2% equities and 24.8% bonds - vs a 75/25 target.
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Re: Another CAPE milestone breached - 26

Post by TheTimeLord »

Browser wrote:I am planning to change the title of this thread to: "Another milestone breached - 26.11". :?
I picked 26.2 because a marathon is 26.2 miles and one of the few races not measured in a integer.
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Re: Another CAPE milestone breached - 26

Post by midareff »

I think I heard yesterday that the SPX (might have been the Dow though) has just exceeded the previous record on a CPI adjusted basis. Hooray and cheers... wait a minute! Doesn't that mean the index is now even higher than the last time it was really, really high and the sky fell?
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Re: Another CAPE milestone breached - 26

Post by TheTimeLord »

midareff wrote:I think I heard yesterday that the SPX (might have been the Dow though) has just exceeded the previous record on a CPI adjusted basis. Hooray and cheers... wait a minute! Doesn't that mean the index is now even higher than the last time it was really, really high and the sky fell?
I believe it was the DOW.
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Re: Another CAPE milestone breached - 26

Post by Longtimelurker »

midareff wrote:I think I heard yesterday that the SPX (might have been the Dow though) has just exceeded the previous record on a CPI adjusted basis. Hooray and cheers... wait a minute! Doesn't that mean the index is now even higher than the last time it was really, really high and the sky fell?

Makes one wonder where earnings are, relative to last high. If only there were a tool where you could ask questions and get answers...
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Re: Another CAPE milestone breached - 26

Post by richard »

There are a few threads to the effect that currently reported CAPE is not really comparable to historic CAPE due to accounting changes that decrease reported earnings. In particular, there was a change some years ago that changed amortization of goodwill, resulting in smaller reported earnings (same underlying economics). Of course a decrease in earnings increases price/earnings, all other things equal.
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Re: Another CAPE milestone breached - 26

Post by Browser »

midareff wrote:I think I heard yesterday that the SPX (might have been the Dow though) has just exceeded the previous record on a CPI adjusted basis. Hooray and cheers... wait a minute! Doesn't that mean the index is now even higher than the last time it was really, really high and the sky fell?
If stocks are ever going to go higher and higher (as they are advertised to do), then at some point they have to cross the sky-falling threshold, correct? If everybody gets nervous and sells when that happens, we're destined to remain range-bound forever. That said, I'm getting nervous... :shock:
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Re: Another CAPE milestone breached - 26

Post by Dxbinvestor »

Shouldn't a 'reasonable' CAPE be somehow adjusted for interest rates, as from what I know about asset pricing theory, stocks earnings yield should be a certain spread % above the risk free rate, and over time this remains a pretty constant spread on a % basis.. stocks don't seem too bad with an earnings yield of 6% when 10-year is 3%.. 50% premium is good, right?
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Re: Another CAPE milestone breached - 26

Post by richard »

Dxbinvestor wrote:Shouldn't a 'reasonable' CAPE be somehow adjusted for interest rates, as from what I know about asset pricing theory, stocks earnings yield should be a certain spread % above the risk free rate, and over time this remains a pretty constant spread on a % basis.. stocks don't seem too bad with an earnings yield of 6% when 10-year is 3%.. 50% premium is good, right?
http://papers.ssrn.com/sol3/papers.cfm? ... _id=381480

Also, are you talking about real rates, nominal rates, rates high due to economic growth, rates high due to Fed putting on the brakes, etc.
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Re: Another CAPE milestone breached - 26

Post by TheTimeLord »

Browser wrote:
midareff wrote:I think I heard yesterday that the SPX (might have been the Dow though) has just exceeded the previous record on a CPI adjusted basis. Hooray and cheers... wait a minute! Doesn't that mean the index is now even higher than the last time it was really, really high and the sky fell?
If stocks are ever going to go higher and higher (as they are advertised to do), then at some point they have to cross the sky-falling threshold, correct? If everybody gets nervous and sells when that happens, we're destined to remain range-bound forever. That said, I'm getting nervous... :shock:
At it's base stocks like everything for sale is supply and demand so they are worth whatever people will pay for them which periodically gets detached from the reality of what they have the potential to earn. That said a 16 p/e if you believe earnings are going to continue to grow and we won't have some unforeseen event (which can always happen) probably isn't that point. Also the markets are suppose to be forward looking vehicles so today's prices are based more on future opportunities than today's earnings. But everyone should invest in a way they see as correct not what they read in someone else's post.
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Re: Another CAPE milestone breached - 26

Post by Dxbinvestor »

richard wrote:
Dxbinvestor wrote:Shouldn't a 'reasonable' CAPE be somehow adjusted for interest rates, as from what I know about asset pricing theory, stocks earnings yield should be a certain spread % above the risk free rate, and over time this remains a pretty constant spread on a % basis.. stocks don't seem too bad with an earnings yield of 6% when 10-year is 3%.. 50% premium is good, right?
http://papers.ssrn.com/sol3/papers.cfm? ... _id=381480

Also, are you talking about real rates, nominal rates, rates high due to economic growth, rates high due to Fed putting on the brakes, etc.
I wasn't really thinking about it from an academic debate POV.. I meant more from a practical 'buy a business' point of view for long term investment. If I have a bunch of cash doing nothing, my choices are either buy stocks at CAPE earnings yield of 4% (1/25), buy treasuries at 2.8%, or find something else. I don't think earnings will go down very much so stocks at 30% premium to treasuries don't seem that bad of a buy, that's all I meant.
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Re: Another CAPE milestone breached - 26

Post by midareff »

Browser wrote:
midareff wrote:I think I heard yesterday that the SPX (might have been the Dow though) has just exceeded the previous record on a CPI adjusted basis. Hooray and cheers... wait a minute! Doesn't that mean the index is now even higher than the last time it was really, really high and the sky fell?
If stocks are ever going to go higher and higher (as they are advertised to do), then at some point they have to cross the sky-falling threshold, correct? If everybody gets nervous and sells when that happens, we're destined to remain range-bound forever. That said, I'm getting nervous... :shock:

It would seem a "range" as impacted by CPI, would be a reasonable thing to expect. We are now over the previous top ... and granted the Dow (and SPX) are "managed" indexes, it should mean something. I do not expect it to mean it keeps going up at this rate much longer..... things that fly with black feathers show up when you least expect them, and are least ready.
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Re: Another CAPE milestone breached - 26

Post by Browser »

Outside of the stock market blowoffs in 1929 and 1999, the highest monthly PE/10 peaks occurred in 2004 and again in 2007 (27.65 and 27.54 respectively). I'm going to get very interested if the current run-up takes us once again into the 27+ area. Not too far away.
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Re: Another CAPE milestone breached - 26

Post by TheTimeLord »

Browser wrote:Outside of the stock market blowoffs in 1929 and 1999, the highest monthly PE/10 peaks occurred in 2004 and again in 2007 (27.65 and 27.54 respectively). I'm going to get very interested if the current run-up takes us once again into the 27+ area. Not too far away.
Image
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Re: Another CAPE milestone breached - 26

Post by TheTimeLord »

Browser wrote:December 23, 2013: The Shiller PE/10 valuation metric has now exceeded 26. Do I hear 27? Going once...going twice....
I would be interesting to see the earning for each year especially the year that is going to fall off and be replaced by 2014. I wonder what the value would be if you replaced that year with current 2014 estimates. It would be interesting to see how much of a difference that makes. Also it would be interesting to know if other declines were led by a year of declining earnings thus spiking the number.
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Re: Another CAPE milestone breached - 26

Post by tyler_cracker »

Browser wrote:I'm going to get very interested if the current run-up takes us once again into the 27+ area.
very interested you say. what actions do you intend to take if it happens?
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Re: Another CAPE milestone breached - 26

Post by Browser »

Here's another interesting factoid. The S&P 500 index is now above it's 2-year moving average by a far greater margin than it was at the peaks just before the 2000 crash and the 2007 crash. It now stands at 21% above the 2-year MA. It was 14% and 12% above the 2-year MA at the market peaks in 2000 and 2007 respectively. Can you spell O-V-E-R-V-A-L-U-E-D? This market may be living on borrowed time....
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Re: Another CAPE milestone breached - 26

Post by Prokofiev »

Ged wrote:Why this particular fascination with integers? Is it some sort of cognitive or cultural bias that integers should be considered more important than other numbers?

Really there are not very many of them compared to the other numbers.
There are just as many integers as fractions.
Last edited by Prokofiev on Wed Dec 25, 2013 1:22 am, edited 1 time in total.
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Re: Another CAPE milestone breached - 26

Post by sperry8 »

StarbuxInvestor wrote:
Browser wrote:Outside of the stock market blowoffs in 1929 and 1999, the highest monthly PE/10 peaks occurred in 2004 and again in 2007 (27.65 and 27.54 respectively). I'm going to get very interested if the current run-up takes us once again into the 27+ area. Not too far away.
Image
I think it's dangerous to ignore history. Look at the tops on that chart? What happened after? Doesn't mean 2014 will be a down year, but it's highly unlikely to be up 30% again. When I look at that chart, I see we're closer to a top than bottom. I sold 10% of my stocks to reduce my asset allocation. Buy low, sell high (and yes, I believe we are higher rather than lower, in part by using this chart).
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Re: Another CAPE milestone breached - 26

Post by midareff »

StarbuxInvestor wrote:
Browser wrote:Outside of the stock market blowoffs in 1929 and 1999, the highest monthly PE/10 peaks occurred in 2004 and again in 2007 (27.65 and 27.54 respectively). I'm going to get very interested if the current run-up takes us once again into the 27+ area. Not too far away.
Image

Are you sure it isn't different this time?
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Re: Another CAPE milestone breached - 26

Post by Dxbinvestor »

Impose an interest rate chart on top this CAPE one and you see something pretty interesting.
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Re: Another CAPE milestone breached - 26

Post by swaption »

Dxbinvestor wrote:
richard wrote:
Dxbinvestor wrote:Shouldn't a 'reasonable' CAPE be somehow adjusted for interest rates, as from what I know about asset pricing theory, stocks earnings yield should be a certain spread % above the risk free rate, and over time this remains a pretty constant spread on a % basis.. stocks don't seem too bad with an earnings yield of 6% when 10-year is 3%.. 50% premium is good, right?
http://papers.ssrn.com/sol3/papers.cfm? ... _id=381480

Also, are you talking about real rates, nominal rates, rates high due to economic growth, rates high due to Fed putting on the brakes, etc.
I wasn't really thinking about it from an academic debate POV.. I meant more from a practical 'buy a business' point of view for long term investment. If I have a bunch of cash doing nothing, my choices are either buy stocks at CAPE earnings yield of 4% (1/25), buy treasuries at 2.8%, or find something else. I don't think earnings will go down very much so stocks at 30% premium to treasuries don't seem that bad of a buy, that's all I meant.
This of course is a very valid comment, that I have tried to drive home in the numerous threads on this topic. But it is the elephant in the room that continue to be ignored by those that want to focus on this metric (besides the also valid accounting considerations). On the one hand you have CAPE, and on the other hand you have a level of real interest rates that puts the current equity risk premium by some measures at a historically high level. The bottom line is, when there are low real rates (less than 1%), pretty much every financial asset will be expensive. This never gets adequately addressed here, so I temper any expectations. But your comments are spot on. If equities are the frying pan, maybe bonds are the fire. While the frying pan ain't great, it may be the best available choice.
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Re: Another CAPE milestone breached - 26

Post by TheTimeLord »

sperry8 wrote:
StarbuxInvestor wrote:
Browser wrote:Outside of the stock market blowoffs in 1929 and 1999, the highest monthly PE/10 peaks occurred in 2004 and again in 2007 (27.65 and 27.54 respectively). I'm going to get very interested if the current run-up takes us once again into the 27+ area. Not too far away.
Image
I think it's dangerous to ignore history. Look at the tops on that chart? What happened after? Doesn't mean 2014 will be a down year, but it's highly unlikely to be up 30% again. When I look at that chart, I see we're closer to a top than bottom. I sold 10% of my stocks to reduce my asset allocation. Buy low, sell high (and yes, I believe we are higher rather than lower, in part by using this chart).
When I look at the chart I think I see something different than the "O-V-E-R-V-A-L-U-E-D" crowd. I see since the mid-90s it appears the S&P above 25 as much as it is below. It appears it has been above 25 more than in all the years prior to the mid-90s combined.
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Re: Another CAPE milestone breached - 26

Post by Browser »

Here's another interesting factoid. Over the period from the first crash in 2000 to the end of 2012, a portfolio with 100% in the S&P 500 had an average annual return of 3.4%, while a portfolio of 50% S&P plus 50% Money Market had an average annual return of 2.7%, which was 23% lower. But you ended up with a total return of 22% with 100% in stocks vs. a total return of 35% with 50% stocks / 50% money market.

Consider this example. Let's say you invested $10,000 in stocks. Stocks decline by 50%, followed by a gain of 100%, lose 50% once again, and subsequently gain 100%. What was your total return?

Starting value = $10,000
50% loss --> $5,000
100% gain --> $10,000
50% loss --> $5,000
100% gain --> $10,000

You total return was zero, even though there were two periods in which stocks gained 100%.

Now, let's consider what would happen if you held a portfolio that reduced both your losses and your gains by half:

Starting value = $10,000
25% loss --> $7,500
50% gain --> $11,250
25% loss --> $8,437
50% gain --> 12,656

Your total return was 27%, even though you missed half the gains in each of the two bull market periods.

So, in a zig-zag market (such as the one from 2000 to the present) you're better off with a portfolio that reduces drawdowns even at the cost of reducing the upside gains. As Warren Buffett said: the first rule of investing is to avoid losses, and the second rule of investing is to never forget rule #1.

Buy-hold-rebalance a fixed stock allocation works well in uptrending markets. It does not work as well in markets that are downtrending or variable. If you believe that the market with a CAPE > 26, that is also elevated on every other valuation measure there is, and is now at a historical premium to it's 2-year trailing average is destined to trend ever higher from here, then holding fast to a high-ish equity allocation makes sense. But if you don't believe that, and instead believe we're likely not at the cusp of a new bull market, then a smaller equity allocation might be in order. You might end up better off, at least over the intermediate (~ 7 to 10 year) run.
We don't know where we are, or where we're going -- but we're making good time.
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tyler_cracker
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Re: Another CAPE milestone breached - 26

Post by tyler_cracker »

Browser wrote:Here's another interesting factoid. The S&P 500 index is now above it's 2-year moving average by a far greater margin than it was at the peaks just before the 2000 crash and the 2007 crash. It now stands at 21% above the 2-year MA. It was 14% and 12% above the 2-year MA at the market peaks in 2000 and 2007 respectively. Can you spell O-V-E-R-V-A-L-U-E-D? This market may be living on borrowed time....
what actions do you intend to take based on this observation?
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tyler_cracker
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Re: Another CAPE milestone breached - 26

Post by tyler_cracker »

Browser wrote: Buy-hold-rebalance a fixed stock allocation works well in uptrending markets. It does not work as well in markets that are downtrending or variable. If you believe that the market with a CAPE > 26, that is also elevated on every other valuation measure there is, and is now at a historical premium to it's 2-year trailing average is destined to trend ever higher from here, then holding fast to a high-ish equity allocation makes sense. But if you don't believe that, and instead believe we're likely not at the cusp of a new bull market, then a smaller equity allocation might be in order. You might end up better off, at least over the intermediate (~ 7 to 10 year) run.
how much are you adjusting your equity allocation based on your observations?

when will you un-adjust that adjustment -- at a specific value of CAPE? some other metric?
singletond
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Re: Another CAPE milestone breached - 26

Post by singletond »

I used to be able to download Robert Shiller's PE10 data in a spreadsheet, but my link only finds old data. I didn't see in a link in this thread. Please could someone post link to PE10 data that is being kept up to date.
Dave
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