I'd agree with much of what you wrote, esp the distorting effects of the tech bubble... except then to be consistent you would have to acknowldege that in the current 10 year CAPE is the financial crisis - a year with what - zero profit? When we roll out of that year and replace it with a high profit year, the CAPE should come down. Maybe that's what investors are doing - ignoring the distorting effect of 2008/9.
Ghost of Igloi wrote:agip wrote:If you are going to use the average PE you should also understand the distortions of the Technology Bubble that led to those high PEs. Furthermore, the same high PEs led to a NASDAQ Composite that dropped 82% and did not get back to even until May 2015, and even today has a 17 1/2 year compounded return under 2%. Also, during that earlier bubble dividend paying stocks were cheap and investors ignored them like the plague. Not today, so called safe havens like McDonald's have attracted funds as bond proxies, and that is why the median stock valuation has never been higher.Ghost of Igloi wrote:note that the 25 year average for the CAPE is 26.3.
Highest CAPE 10 since the Technology Bubble (August 2001). Now approaching the 1929 Stock Market Crash High (August 1929).
So we're not that far over the quarter century average.
But yeah...expensive market.
McDonald's is up 29% on the year, while the corporate debt has doubled from $12.5 Billion to $25.95 Billion in six years. During that same period revenues have declined from $27 Billion to $24.6 Billion, and shares outstanding have declined from 1.021 billion to 819 million. So, the road to â€œprofitabilityâ€ in terms of earnings per share (EPS) is driven by borrowing money to buy back their own stock at ever higher prices. Even with that nonsense the stock still trades at the rich price to earnings ratio (PE) of 26, when the average historical market PE is about 16 (the lower the more attractively valued). That is, investors are paying 62.5% higher for unit of earnings than normal, and it is far worse, because the EPS is juiced by the lower share count. EPS is calculated by dividing the earnings by the shares publicly traded. Of course one can see the disaster if all the debt has to be refinanced at higher rates. Bottom line there is no company growth, financial engineering is driving performance and investors are behaving foolishly. You can see similar monkey business in other somewhat staid businesses such as Proctor and Gamble, Johnson and Johnson, Hewlett Packard and Microsoft to name a few.
Todayâ€™s investment climate is far from normal. In the meantime investors remain in a state of "blissful delusion" (credit to John Hussman).