Are stocks expensive? On an absolute basis, yes. As Greenbackd.com and Mebanefaber.com have recently pointed out, the Shiller P/E, or cyclically-adjusted P/E (CAPE), is at a historical high. We have the last reading at 22.65.
To keep tabs on CAPE and related measures, we built a new module in Turnkey to help investors quickly understand where returns might be heading. https://alpha.turnkeyanalyst.com/macroviews
First, we like to look at all returns on all assets in terms of yields. A P/E type ratio isn’t comparable to a bond yield or a dividend yield. However, the inverted P/E, or E/P, does mean something–it is essentially an “earnings” yield. The earnings yield is more comparable to other yields in the market place.
A simple question: How does the current real earnings yield (1/CAPE) stack up relative to historical real earnings yields?
At it stands as of 3/31/2013, the current real earnings yield is 4.4%, which sits at the ~13th percentile, historically.
In other words, stocks are very rich!
A simple question: How does the current real earnings yield (1/CAPE) stack up relative to the real yield on 10-year government bonds?
As of 3/31/2013, the current real spread between stocks and bonds is ~4%, which sits at the ~53rd percentile, historically.
In other words, stock prices are not that expensive relative to bonds.
So what are investors to do? Bonds don’t offer much; stocks offer more; but no asset looks attractive.
Cry in your pillow, wipe your tears with the cash you have lying under your bed, and hope for a market crash in the future.
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