Down goes the Dow

I showed for the last decade. You are showing since 2010 though the difference is not great.

I’ve just taken a fairly deep dive into Shiller’s CAPE data, which I’ve taken straight from the horse’s mouth here:

Dang it:

Shiller likes to plot his CAPE, and also “excess CAPE yield,” another metric derived from CAPE and dividend yield, corrected for inflation, against future index change, looking 10 years into the future. The worry is that CAPE being as high as it has been (and excess yield as low as it has been) suggests low ten year future returns. Igy takes this as an article of faith, best I can tell, assuming that high CAPE predicts low returns.
When you look carefully at the data, the correlations with forward returns are very weak, in my view to the point of being nearly meaningless. I could share some of the findings, but my sense is that most of us don’t care so much for data, statistics, trends, graphs and such, so I’ll just leave that thought, claimed without proof for now.

I assume your thought is not directly linked to my post.

In the past decade many traditional metrics related to asset valuations have been distorted by central bank policy. I would tend to believe those distortions even out over long time periods. If you are using distorted data today, any statical analysis would yield a result that would produce lower correlation.

Clearly investors are willing to pay double for a unit of Apple earnings than they were eight years ago, assuming there is some value there. Maybe in trading to one another, but at today’s price not likely in the cash flow. Same is true of the market, which CAPE attempts to do.

In my view, it remains a fake market where little fundamental matches reality; designed as such by the Fed, until inflation got out of hand. By the way, if using standard accounting the Fed balance sheet has $2 Trillion in losses. And the Fed cannot print money, that is the role of Treasury. And they are certainly forced to do it at current rates.

Octavio Costa today, on Twitter:

“Here is a reminder that the overall equity market valuations remain at an extraordinarily high level.

After re-testing the peak tech bubble levels on a 5-year cyclically adjusted P/E ratio basis, stocks are still more overvalued than they were before the Great Depression in October 1929.

The cost of debt is on the rise, and justifying today's fundamental multiples is becoming increasingly challenging.

On a separate note:
It's astonishing to hear people draw comparisons between the current economic environment and the prosperous period of the 1920s.

Back then, the 5-year CAPE ratio was less than 5, or the lowest level in history.
Today's situation is markedly different.”

the median SP500 stock has a forward PE of 17. Not high.

Over the last 25 years the average number for that measurement is...16.

So we're at fairly normal levels by that measurement. All-in, forward PE is around 19 vs an average of 17. Getting higher.

the problem, obvi, is the giant tech stocks. They are few in number but are making the market appear more expensive than the average stock.

But of course the conundrum...the big tech stocks are where the money has been made for years and years. Why would that change?

You sure love Forward P/E. Second 1/2 of 2021, maybe on this thread or other threads you were typing merits of forward p/e. I am trying to figure out the difference between forward p/e and a Wild @ss Guess! You sure were quiet regarding forecasting for much of 2022. Please note: Eleven of 20 of the largest daily S&P 500 point losses, 2022, not long after you were saying: forward p/e in 2021.

For the record:

P/E is a fact based on hard work of accountants and finance majors.

Forward p/e is a guess.

I don't disagree ...we should look at both.

The problem with trailing 12m PE is that the market does not trade on what happened 6-12 months ago. It trades on what will happen 6-12m in the future.

But on the other hand estimating earnings 12m out is guesswork, agreed.

A problem is that I get most of my data from the JPM Guide to the Markets and it uses forward PE and not trailing 12m PE. So I'm a bit limited. I should poke around and find a reliable source for backward PEs and use both.

PS

I do disagree that PE is a 'fact.' Earnings are always an opinion. You see Igy focusing on GAP earnings..others prefer operating or adjusted or cash flow or whatnot. Accountants know how much gray area there is in defining 'earnings.' There's an old expression: Sales are facts, earnings are opinions.

A couple of points, CAPE uses GAAP actual EPS and does not use Forward Operating Earnings which is an estimate. CAPE is a 10 year back look average adjusted for inflation. Forward is more often than not lowered during the quarter since it is Wall Street estimate, and adjusted with guidance from firms. Forward is higher because it does not include stock based compensation, the cost of failed businesses, among other actual expenses. GAAP EPS is the number required by law, to be signed off by the company in quarterly and annual filings to the SEC. Often times Wall Street uses the blended best of GAAP and Operating (non-GAAP) to present the best picture.

The estimated GAAP PE for the most recently completed quarter (Q2), and based on June closing price for the S&P 500 is 24.56, which is well above the historical CAPE average of ~16. This number can be compared to agip’s, but not to CAPE other than the raw number once all the results are tabulated for the quarter.

The S&P 500 Tax Rate from 1993 averages ~30% annually. However, from 3/2019 thru 6/2023 the quarterly Tax Rate annualized at ~20%, reflecting the Republican tax cut of 2018. So, if we are indeed comparing apples to apples, and look at actual Federal spending versus tax receipts, the performance of S&P 500 EPS is being subsidized by the reduction in Federal Government tax receipts, and also subsidized below market interest rates coming from the Fed starting in 2008.

Now one is fair in saying one should trade the market they have, not the one they want. I supposed the same logic could be applied to the belief in TINA, and the subsequent loss of 45% on long term bonds bought and held since 2021.

CAPE is a historical metric. It has absolutely nothing to do with the future.

I agree with this. Shiller likes to think it gives an indication of future returns, but it really doesn't do that very well, if at all. I'll try to share some more specific criticism over the next day or two to defend this point of view.

(1) No, I was just making a general observation, although the idea was mainly directed toward you as a follower of Shiller-esque PE-based value investing.

(2) Shiller’s data go back to the late 1800s. People have been fiddling with the dials of the US economy the whole time.

Retired,

The attached article, a staff memo from Sweden’s Riksbank attempts to reconcile lower interest influence on Shiller’s metric with CAPE 10 Excess Yield. Includes some of their methodology which might be of interest.

Igy

Yeah nah this one didn't work out, Rosenberg. SP500 is up 14% since this tweet. I think it was your face that was ripped off, no?

David Rosenberg
@EconguyRosie
Boston Fed did some nifty work correlating real rates to equities. Which means this….the S&P 500 is soon heading back to the cycle low. Let the bots get their faces ripped off. Humans don’t have to.
7:50 AM · Mar 9, 2023
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88.1K
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Really should go back to include 2008 or 2001

The future is unrelated to the past?

Not this time...SP500 up 4% three months after this extreme reading. Another indicator that did not work this time.

jeroen blokland
@jsblokland
The #SKEW Index, a measure of potential tail #risk or #blackswan events in financial markets derived from out-of-the-money options, has spiked to extreme levels.
The last time we saw a level this high was at the start of 2022...
Contrary to what some investors believe, a very high SKEW Index is a bearish signal. The three-month average return on the S&P 500 Index following an extreme reading has been -0.1%.

2:17 AM · Jun 2, 2023
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27.1K
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Speaking of past, in the past hour:

JUST IN : CHINA SEEKS TO BROADEN ITS IPHONE BAN TO EVEN STATE COMPANIES AND OTHER AGENCIES