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Based On 100 Years of Data, We Are Likely Nearing a Major Peak
Today I’m going to tell you about the single most important metric for long-term investing.
That metric is the cyclically adjusted price-to-earnings ratio or CAPE ratio.
Generally speaking, most investors price a company based on its current Price to Earnings or P/E ratio. Essentially what you’re doing is comparing the price of the company today to its ability to produce earnings (cash).
However, corporate earnings are heavily influenced by the business cycle.
Typically the US experiences a boom and bust once every ten years or so. As such, companies will naturally have higher P/E’s at some points and lower P/E’s at other. This is based solely on the business cycle and nothing else.
CAPE adjusts for this by measuring the price of stocks against the average of ten years’ worth of earnings, adjusted for inflation. By doing this, it presents you with a clearer, more objective picture of a company’s ability to produce cash in any economic environment.
I mentioned before that CAPE is the single most important metric for long-term investors. I wasn’t saying that for impact.
Based on a study completed Vanguard, CAPE was the single best metric for measuring future stock returns. Indeed, CAPE outperformed
1. P/E ratios
2. Government Debt/ GDP
3. Dividend yield
4. The Fed Model,
…and many other metrics used by investors to predict market value.
So what is CAPE telling us today?
Today the S&P 500 has a CAPE of over 24. This means the market as a whole is trading at 22 times its average earnings of the last ten years.
Put another way, if you bought the entire stock market today, it would take you roughly 22 years to make your money back.
That is hardly what I’d call cheap.
Indeed, as you’ll note in the above chart, the market has only been above this level three times in history. They were the 1929 Bubble, the Tech Bubble and the Housing Bubble.
All of these times occurred close to market peaks.
This is not to say that stocks can’t go even higher than they are today. Bubbles, such as the one we’re experiencing today, can often last longer than anyone expects.
However, the fact is that the markets are significantly overpriced. And based on over 100 years worth of data, this kind of overvaluation usually precedes a market peak.
This doesn’t mean the markets will crash next week or next month. But it does pose a warning to those who are heavily allocated to stocks, expecting to see significant upside in the long-term.
For a FREE Special Report outlining how to protect your portfolio from the Fed’s policies, swing by: http://phoenixcapitalmarketing.com/special-reports.html
Best
Phoenix Capital Research
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How does this guy stay in business? How can someone be so wrong for so long and you are still considered a valued contributor and get articles on top?
So this CAPE is the Shiller P/E, right?
I like these high quality articles, I always put heavily leveraged sell orders on all the indices after reading each one of these articles. Also I'm selling all my tangible assets to pay the margin calls, Soon the market will crash and I will be wealthy and able to retire to Vanuatu. Soon. Just around the corner. I can't wait.
This really is the best free advice I have ever seen!
Why does this tool keep getting to post this crap? This is the same guy that predicted a market crash last year, and that the Euros would be eating each other the year before. Not withstanding the deplorable state of the economy and suspect state of the capital markets, because a single metric (even one of some analytical value) is at a level that it has been at or above for most of the last 30 years, we are supposed to take it as flashing red light of a crash tomorrow (or never). Please. Is this drivel really all one needs to right to sell newsletters?
When I've asked that in the past it was suggest to maybe think of it as trainer-wheels for noobs. I wouldn't want to learn to drive in a Ford Prefect though, my current car has considerably better steering, suspension, brakes, stability, crumple-zones and airbags. A learner would be much safer in the real deal.
Tylers- Why do you even post this douch bag?
He is a one trick pony who told us all the end of the world was here at DOW 10,000!!
Gold Dog
PS- I suppose some day he will be brilliant!
X 1,000,000
GFO Summers
The CAPE is not even close to the levels of the 1929 crash let alone 1999. It might actually reach 2007 levels within a year. And today, the bubble is being actively pumped by the most powerful force on earth - the US Federal Reserve. That was not true before. As long as QE is really forever, stocks could rise until the CAPE ratio blows all previous records out of the water. A value of 100 or even 200 should become possible until the financial system itself blows up. Based on the current rate of QE, the S&P 500 should be at 2700 in 3 years, right before the 2016 elections. If the Fed increases QE, it could go much higher than that.
"And today, the bubble is being actively pumped by the most powerful force on earth - the US Federal Reserve. That was not true before."
Not true. The Fed was pumping 2007 and they pumped like crazy into 2000. The "Committee to Save The World" :)
The Fed will do what it wants....whether the rest of the world will tolerate the Fed's actions is the real question.
Sure we could see DOW 36,000 but will the oil producers want any part of a dollar worth that little. It is quite clear that the higher prices in the markets is NOT due to growth and inflated dollars won't have too many friends.
The problem is that the worse things get the harder they will try to fix it. They cannot step back at this point and let the whole thing collapse. The best option for the fed is to have some sort of control over those deleveraging while ensuring liquidity in the system. As the markets seem to be one of the primary conduits. We can expect this equities bubble to continue indefinitely, regardless of any "normal" expectations.
The .Gov could tax the fed and send cheques out to everyone, this would be boon to the Chinese economy and the deficit, while furthering the illusion of prosperity.
Don't laugh the Australian .gov did a similar thing during the GFC in early 2009.
Don't know if you realize this grogman but GW Bush also did a 'direct-stimulus' injection to accounts in 2008 around the Bear Sterns collapse if I remember its timing correctly.
Anyway, it was too late plus the policy was heavily criticized and then also deemed to have failed to get results. But as I remember it you could see the bump from it, if you looked at GDP in the period (revised to death ever since).
EDIT: http://en.wikipedia.org/wiki/Economic_Stimulus_Act_of_2008
by the looks of it the Corpocracy feudal order in charge of QE ascepticised NWO is right on track.
If all the boys play the same tune on all continents; aka China, Japan, Russia (?)-- bad member in Syria but Mutti has them by the nuts if they want to sell gas--, EU, UK, USA, Canada, Australia, Brazil, SA, Saudi ; Then we can print 1 trillion petrodollars per month and keep the cess pool of fiat liquid at the expense of the sheeple.
No problems, we control the corporates in crony baloney and our print press is the best and as $ prints to devaluate reserve and when the others get restless about currency wars we give them some slack and then a whack on the ass as we are big boss.
Big Sleep now coming and when the Rip Van Winkle generation is allowed to wake up in 2050 they hope the financial cloud will have dissipated.
THis is plan A and there is no plan B and if your are not for it you are against the Oligarchy and a heretic.
Watch out the NSA is the new inquisitorial arm and has its eyes and ears wide open all over the globe.
Welcome to "1984"... now in operation thirty years after!
" when i read those trader's emails, i felt physically sick "
THAT THEY WERE NOT ENCRYPTED. Bob Diamond Esq.
1913 - 2013 = 100 years FED.
'Nuff said.
There's a certain twisted sickness to all of this. Woodrow, afterall, was the leader of the 'Progressive Movement' and an academic. No wonder the world went in the toilet. Now we have a community organizer for God's sake. What next, 'Domestic Partner'? I believe a seasoned bartender would be a better choice!
There's no retribution. No pain. Until one of these bankster pricks/twats gets pinged with a magnum or a hefty f..... jail sentence they'll continue walking on water just like JC.
But... You should know this by now... This time it REALLY is different. People who know what they're doing are steering us through this period of growth and they have the best intentions to help everyone and soon everything will be full employment and moeny for everyone... Ah... Where's my gun. bang.
Well, gee, its a one off payment. Bet he makes a lot less this year. Maybe. He is a clever bastard after all.
No need for 100 years of data, one year will do just fine
Facebook (NASDAQ: FB) CEO Mark Zuckerberg was the highest paid CEO of a North American public company last year, with total compensation of $2.28 billion — almost all of it coming from share options exercised when Facebook went public, according to GMI Ratings, a global research firm.
http://www.bizjournals.com/sanfrancisco/blog/2013/10/apple-facebook-sale...
Only in America!