No. of Recommendations: 31
All calculated for today (9 Feb).
Current Shiller PE Ratio: 29.91
Mean: 17.00 (1870-today)
Median: 15.91
Min: 4.78 (Dec 1920)
Max: 44.19 (Dec 1999)
The Shiller PE (also called CAPE ratio) uses the 10 year average earnings adjusted for inflation, and compares to the same calculation made throughout the past so that the year-to-year noise can be largely cancelled out. On this measure, the S&P500 is now valued at 30, versus the median value of 15, so exactly twice as expensive.
To reach the last minimum value for the Shiller PE ratio again, the S&P500 would need to fall 84%. Unlikely, but I thought I'd just remind what has occurred in the past for those taking on margin debt.
Current S&P 500 PE Ratio (ttm): 22.01
Mean: 15.99 (1870-today)
Median: 14.91
Min: 5.31 (Dec 1917)
Max: 123.73 (May 2009)
Looking back to 1870 again, and considering just the plain PE ratio, we are 22/16 = 47% above the norm, however earnings are still rather elevated (which is why many prefer to use the Shiller PE ratio) so we are likely more than 47% above the norm if we adjust the present earnings down a little. Keep in mind that real earnings of the S&P500 grew by less than 2% per year over the last century. Most of the wealth provided to shareholders was always via dividends, with the capital gains on average barely keeping ahead of inflation. Very few view the past (and certainly not the present) in this way, but probably should.
As a sanity check, the sales per share of the S&P500 from over the last 22 years from $750 to $1714, which is an average annual return of 3.8%. That approximately matches the whole-period inflation, which means that real sales have remained unchanged since 2001. The value paid out to shareholders was via the dividends along the way. There have been capital gains over the last two decades, but much of the capital gains are accounted for by an increase in the valuation over that period, rather than the real intrinsic value increasing (you can use the sales per share as a rough proxy for the underlying normalised value of the S&P500 in the time-relative sense).
Over the last 22 years there has been a one-time large increase is corporate margins, so the growth in earnings per share has faired much better. However we can go from lower margins to higher margins, but you should not bet on going from the current high corporate earnings to even higher (much higher) corporate earnings 20 years into the future, which would be required if you want to see the same eps growth as you are accustomed to. If the current high corporate margins are merely sustained, then expect a lower eps growth than you are accustomed to seeing. If they return to where they were, expect large real earnings per share declines.
Current S&P 500 Price to Book Value: 4.13
Mean: 2.96 (2000-today)
Median: 2.81
Min: 1.78 (Mar 2009)
Max: 5.06 (Mar 2000)
The price to book value is a completely different way of looking at the valuation, and on this measure we are also 47% overvalued compared to the data back to 2000 (which is a period that on the whole has been a fairly optimistic, and thus low yielding). Price to book values have been much lower prior to 2000.
The commonly cited total return of the S&P500 over the long-term is about 6-7% after inflation, made popular by Jeremy Siegel, however that assumes (1) we are starting from an average valuation, (2) the next 20 years from here covers similarly highly accommodating pro-business policies, and we have no more energy constraints than we had in the past. I believe 2 is likely to cause substantially lower returns, though most don't pay attention to it, but everyone should at least pay attention to 1, and then adjust your expectation of long-term forward returns accordingly. Combining 1 and 2 has an elevated effect.
If you believe we need a 40% downwards revision in the S&P500 quote to reach an average baseline, and you are still going to get your full 6.5% over the long-term, then you need about 8 years of no returns whatsoever to catch up. (1/1.065^8-1 corresponds to a 40% fall).
Stocks returning 6.5% real is a statistic with many premises. Statistics may lie when simplified, but they don't tend to lie when expanded carefully, and the epistemology is reflected upon. If you really want something, one can start to believe it is true, but that usually doesn't make it true.
Having said that, provided one's expectations are sufficiently low, then investing can remain alive and well. It is when expectations greatly exceed the central likely outcome that planning problems (especially when debt is involved) can become inconvenient!
- Manlobbi
