{"id":16039,"date":"2017-12-09T11:44:02","date_gmt":"2017-12-09T11:44:02","guid":{"rendered":"http:\/\/thepatientinvestor.com\/?p=16039"},"modified":"2017-12-10T07:29:18","modified_gmt":"2017-12-10T07:29:18","slug":"cape-v-pemax-how-hot-are-market-valuations","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2017\/12\/09\/cape-v-pemax-how-hot-are-market-valuations\/","title":{"rendered":"CAPE v PEMAX: How hot are market valuations?"},"content":{"rendered":"

Robert Shiller’s CAPE ratio is currently at 32.17, the second-highest peak in recorded history. According to multpl.com<\/a>, prior to the Black Tuesday crash of 1929 CAPE had a reading of 30. The only peak with a higher reading is the Dotcom bubble at 44.<\/p>\n


\n\"Shiller<\/p>\n

Click here to view at multpl.com.<\/p>\n

<\/a><\/p>\n

Shiller’s CAPE, or Cyclically Adjusted PE Ratio to give it its full name, compares the current S&P 500 index value to the 10-year average of inflation-adjusted earnings. The aim is to smooth out the earnings cycle and provide a stable assessment of long-term potential earnings.<\/p>\n

But earnings have fluctuated wildly in the past 10 years, and a 10-year average which includes severe losses from 2009 may not be an accurate reflection of current earnings potential.<\/p>\n

\"S&P<\/p>\n

The dark line plotted on the above chart reflects the highest earnings to-date, or maximum EPS. The market often references this as the current, long-term earnings potential, in place of cyclical earnings.<\/p>\n

The chart below compares maximum EPS (the highest earnings to-date) to the S&P 500 index. The horizontal periods on max EPS reflect when cyclical earnings are falling.<\/p>\n

\"S&P<\/p>\n

It is clear that the index falls in response to cyclical fluctuations in earnings (the flat periods on EPS max). But it is also clear that earnings quickly recover to new highs after the index has bottomed. In Q1 of 2004 after the Dotcom crash and in Q3 of 2011 after the 2008 global financial crisis.<\/p>\n

The next chart plots the current index price divided by maximum earnings to-date. I call it PEMAX. When earnings are making new highs, as at present, PEMAX will reflect the same ratio as for trailing 12-month PE<\/a>. When earnings are below the previous high, PEMAX is lower than the trailing PE.<\/p>\n

\"S&P<\/p>\n

What the chart shows is that, outside of the Dotcom bubble, prices are highest in the last 30 years relative to current earnings potential. The current value of 22.56 is higher than at any time other than the surge leading into the Dotcom crash.<\/p>\n

The peak value during the Dotcom bubble was 30.19 in Q2 of 1999. The highest value in the lead-up to the GFC was 20.23 in Q4 of 2003.<\/p>\n

Does the current value of 22.56 mean that the market is about to crash?<\/p>\n

No. The Dotcom bubble went on for two more years after reaching 22.80 in Q3 of 1997. The present run may continue for a while longer.<\/p>\n

But it does serve as a reminder to investors that they are paying top-dollar for stocks. And at some point values are going to fall to the point that sanity is restored.<\/p>\n

\n

The four most expensive words in the English language are “this time it’s different.”\n<\/p>\n

\n~ Sir John Templeton\n<\/p>\n<\/blockquote>\n","protected":false},"excerpt":{"rendered":"

Robert Shiller’s CAPE ratio is currently at 32.17, the second-highest peak in recorded history. According to multpl.com, prior to the Black Tuesday crash of 1929 CAPE had a reading of 30. The only peak with a higher reading is the Dotcom bubble at 44. Click here to view at multpl.com. Shiller’s CAPE, or Cyclically Adjusted … <\/p>\n

Continue reading “CAPE v PEMAX: How hot are market valuations?”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[24,57],"tags":[567,3766,2979],"class_list":["post-16039","post","type-post","status-publish","format-standard","hentry","category-quotes","category-stock-markets","tag-cape","tag-pemax","tag-robert-shiller"],"yoast_head":"\nCAPE v PEMAX: How hot are market valuations? - the patient investor<\/title>\n<meta name=\"robots\" content=\"noindex, follow\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"CAPE v PEMAX: How hot are market valuations? - the patient investor\" \/>\n<meta property=\"og:description\" content=\"Robert Shiller’s CAPE ratio is currently at 32.17, the second-highest peak in recorded history. 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PEMAX eliminates the distortion caused by cyclical earnings fluctuations, using the highest earnings to-date rather than current earnings. The idea being that cyclical declines in earnings reflect a fall in capacity utilization rather than a long-term drop\u2026","rel":"","context":"In "Earnings & Dividends"","block_context":{"text":"Earnings & Dividends","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/investing\/earnings-dividends\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":17741,"url":"https:\/\/thepatientinvestor.com\/index.php\/2019\/01\/15\/pemax-why-you-should-be-cautious-using-robert-shillers-cape\/","url_meta":{"origin":16039,"position":1},"title":"PEmax and why you should be wary of Robert Shiller’s CAPE","author":"Colin Twiggs","date":"January 15, 2019","format":false,"excerpt":"Robert Shiller's groundbreaking works, Irrational Exuberance and Animal Spirits, led to a Nobel prize in 2013 but we need to be careful of placing too much reliance on his CAPE as an indicator of stock market value. What is CAPE? CAPE is the cyclically adjusted price-to-earnings ratio, normally applied to\u2026","rel":"","context":"In "Earnings & Dividends"","block_context":{"text":"Earnings & Dividends","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/investing\/earnings-dividends\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":31638,"url":"https:\/\/thepatientinvestor.com\/index.php\/2022\/03\/23\/the-stock-market-mania\/","url_meta":{"origin":16039,"position":2},"title":"The stock market mania","author":"Colin Twiggs","date":"March 23, 2022","format":false,"excerpt":"Stan Druckenmiller says that the bull market reminds him of the Dotcom boom, but he cautioned that asset prices could continue rising for a while: \"I have no doubt that we are in a raging mania in all assets.\" Jeremy Grantham describes the market as \"a fully fledged epic bubble\":\u2026","rel":"","context":"In "GDP and Activity"","block_context":{"text":"GDP and Activity","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/gdp-and-activity\/"},"img":{"alt_text":"Market Cap\/Corporate Profits After Tax","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-03-22-mktcap-npat.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-03-22-mktcap-npat.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-03-22-mktcap-npat.png?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-03-22-mktcap-npat.png?resize=700%2C400&ssl=1 2x"},"classes":[]},{"id":18217,"url":"https:\/\/thepatientinvestor.com\/index.php\/2019\/05\/17\/is-the-sp-500-way-over-priced\/","url_meta":{"origin":16039,"position":3},"title":"Is the S&P 500 way over-priced?","author":"Colin Twiggs","date":"May 17, 2019","format":false,"excerpt":"Robert Shiller's CAPE (Price\/10-year simple MA of inflation-adjusted earnings) is at 30.31, the second-highest peak (behind the Dotcom bubble) in 120 years. PEmax (Price\/highest prior 12-month earnings) is far lower at 21.04. I prefer this as a more accurate measure of stock pricing than CAPE. But PEmax is still high\u2026","rel":"","context":"In "Stock Markets"","block_context":{"text":"Stock Markets","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/stock-markets\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":24883,"url":"https:\/\/thepatientinvestor.com\/index.php\/2021\/03\/30\/margin-calls-are-coming\/","url_meta":{"origin":16039,"position":4},"title":"Margin calls are coming","author":"Colin Twiggs","date":"March 30, 2021","format":false,"excerpt":"....Goldman Sachs and Morgan Stanley sold shares in Viacom, Discovery and a number of Chinese companies listed on US exchanges, including Tencent, and Baidu, wiping about $US35 billion off the market value of the companies involved. The sales were reportedly the result of lenders making margin calls on Archegos Capital\u2026","rel":"","context":"In "Debt Levels"","block_context":{"text":"Debt Levels","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/debt-levels\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":43986,"url":"https:\/\/thepatientinvestor.com\/index.php\/2023\/09\/08\/overpriced-sp-500-ignores-declining-growth\/","url_meta":{"origin":16039,"position":5},"title":"Overpriced S&P 500 ignores declining growth","author":"Colin Twiggs","date":"September 8, 2023","format":false,"excerpt":"The S&P 500 price-to-sales ratio jumped to 2.44 in June -- way above its long-term average of 1.68. Price-earnings ratio (PE) calculated using highest trailing earnings, surged to 22.5 in June -- well above the peaks from earlier crises like October 1929 (Black Friday) and October 1987 (Black Monday). Robert\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"S&P 500 Price-to-Sales","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-09-07-spx--sales.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-09-07-spx--sales.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-09-07-spx--sales.png?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-09-07-spx--sales.png?resize=700%2C400&ssl=1 2x"},"classes":[]}],"_links":{"self":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/16039","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/comments?post=16039"}],"version-history":[{"count":13,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/16039\/revisions"}],"predecessor-version":[{"id":16053,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/16039\/revisions\/16053"}],"wp:attachment":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/media?parent=16039"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/categories?post=16039"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/tags?post=16039"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}