CAPE10: Observations and Graphs

[audreyh1]

Just some thoughts and info on the Shiller CAPE10. You can easily view it at the site https://www.multpl.com/shiller-pe . You can look at the CAPE10 graph, see a table, view data by month, as well as look at S&P500 profits, yield, etc.

I’ve been following CAPE10 for a long time. I actually use it to tweak my AA just a wee bit.

2018 and 2019 were interesting to CAPE observers because the drastic drops in corporate earnings reported in late 2008 and 2009 introduced what some felt was an “aberration” into the CAPE10 ratio, and many people expected the graph to “normalize” after that data finally rolled out of the 10 year range. Well, it didn’t happen that dramatically. The CAPE10, which has lately been at extreme levels historically, did drop during 2019, but only a little. And it has already rebounded again.

CAPE10 is a 10 year inflation adjusted average of the S&P500 index versus S&P500 corporate earnings designed to capture and average over a complete business cycle. Due to the inflation adjustment, older data usually tends to have a bit less weight than more recent data.

Another important thing to realize when you look at the graphs, is that corporate profit data is often delayed 3 or 4 months as it’s reported quarterly. So you aren’t getting a real time picture. The last 3 or 4 months of data points are often estimates based on stale data. But in the long term view that doesn’t really matter.

Also interestingly, corporate earning have been declining since Feb 2019, but we only can see through Sept 2019. This has the effect of pushing CAPE10 up if indexes are climbing at the same time profits are declining. I’m anxiously awaiting the Q4 data to see if corporate profits have continued to decline.

The raw data is here, and you can see they are still waiting on complete Q4 corporate earnings for Q4 2019. http://www.econ.yale.edu/~shiller/data/ie_data.xls

 

[USGrant1962]

Just some thoughts and info on the Shiller CAPE10. You can easily view it at the site https://www.multpl.com/shiller-pe

...

CAPE10 is a 10 year inflation adjusted average of the S&P500 index versus S&P500 corporate earnings designed to capture and average over a complete business cycle. Due to the inflation adjustment, older data usually tends to have a bit less weight than more recent data.

...

The earnings are averaged, not the index. Both the index and the earnings are adjusted for inflation.

 

[audreyh1]

The earnings are averaged, not the index. Both the index and the earnings are adjusted for inflation.

Right - thanks for spelling out that it’s the earnings that are averaged.

 

[Lsbcal]

For purposes of market timing I chose to look at the PE10 ranked over the last 30 years. So currently that would be for 1990-2020 and is around 82% (maybe a little higher with the recent rising SP500). On that basis it is not in the nose bleed area. FWIW, when I've modeled it other valuation measures have a larger effect. At 90% rank I'd give it some weight in a for short term timing methodology.

We know that PE10 has not been really a great predictor of near term trends. Maybe best for way out there, like over the next 10 years.

 

[BeachOrCity]

I can’t really quantify it, but I think a big part of why investors are still buying stocks at higher CAPE and or PE ratios is that yields on safer alternatives such as bonds CDs real estate are all historically low. So it is really just about picking which high priced / low yield investment one wants.

The old adage “everything is high”.

If one is at or near FI I think the prudent thing to do is have an AA that let’s you wait out a 10+ year sucky return period (like the 2000s or the 1970s).

 

[DrRoy]

I think a big part of why investors are still buying stocks at higher CAPE and or PE ratios is that yields on safer alternatives such as bonds CDs real estate are all historically low. So it is really just about picking which high priced / low yield investment one wants.

+1

CAPE/PE is high, but the perceived value of earnings is related to interest rates, which are low and are expected to remain low. Also, the Fed is doing stealth QE.

 

[COcheesehead]

Everything works until it doesn’t.
Stay well diversified, have some sort of “yield shield” in place.
Enjoy life.