Valuation Metrics United States Stock Market

December 2019
CAPE Ratio: 30.91
US stocks are extremely overvalued

S&P500 CAPE Ratio

The chart above shows the Shiller PE ratio for the S&P 500. Price earnings ratio is based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE (CAPE) Ratio, Shiller PE Ratio, or PE 10. Robert Shiller cautions against using CAPE to time crashes and make short-term trades. Rather, he stresses that CAPE is more useful in predicting longer-term returns.

The average CAPE Ratio from 1880 to December 2019 is 17. The current CAPE ratio 30.91 is above the average and therefore suggests the S&P500 is on the high side. Indeed when the CAPE ratio exceeded 25 in 2014 Shiller warned:

'a level that has been surpassed since 1881 in only three previous periods: the years clustered around 1929, 1999 and 2007. Major market drops followed those peaks.'

The chart above shows the CAPE ratio plotted against the S&P500. We can observe that during periods of a high CAPE ratio the returns over the next decade are lacklustre.

Warren Buffett Valuation Indicator

Another way to measure price against value is Warren Buffet's cap to GNP ratio. This is calculated by dividing the total market capitalization (approximated by the Wilshire 5000 index) by the gross national product (GNP). In this case the total market capitalization is the price that investors in aggregate are paying for all shares of all public companies. The GNP is the actual economic output of the country. For the chart above I have used GNP, the same as Warren Buffet, however other versions use GDP instead.

The value of all the equities in the Wilshire 5000 Total Market Full Cap Index currently stands at $31.74 trillion dollars. This represents approximately 152% of the country's GNP.

Leave a Reply

Your email address will not be published.