“Our best valuation measures are singularly at the highest levels in history, exceeding both 1929 and 2000. In contrast, the CAPE is only in the top 3% of historical levels. That’s because the profit margin embedded into the CAPE (the denominator of the CAPE, divided by S&P 500 revenues) is easily at the highest level in history. Indeed, it’s over 40% above its historical median. We don’t need to assume anywhere near a full reversion to the median. Even a return to the highest embedded margin ever observed prior to 2015 would cut that difference roughly in half. So despite the fact that the CAPE is above 97% of all readings in history, one should consider even this reading to be understated – unless one is also willing to rely on the assumption that the profit margin embedded into the CAPE will remain at the most extreme level in history, forever.
Again, I can’t say this enough: I am a great admirer of Robert Shiller. But I am also deeply concerned by the fiction – increasingly bordering on propaganda – that depressed interest rates somehow “justify” what are now easily the most extreme stock market valuations in history, based on the measures that we find best correlated with actual subsequent market returns.”
John Hussman, December Market Commentary