When we last looked at the updated CAPE and q S&P valuation readings as compiled quarterly by Smithers & Co, the market was only 48% overvalued. It is therefore not surprising that following one of the most ridiculous melt ups in the past two years (and we have had many in that period) that following the firm's most recent Z1 update of the CAPE (Cyclically Adjusted PE) and Tobin q chart, the S&P is now well over 70% overpriced. This is obviously amateur hour. With the Bernanke Put having eliminated all risk and stock trading lab rats now concerned about being bumped up in a higher tax bracket, not to mention that the S&P 500 20 day historical vol just hit 39 year lows, please wake us up only when this number is in the 4 digit range.
From Smithers & Co.
With the publication of the Flow of Funds data up to 30th September 2010 (on 8th December 2010), we have updated our calculations for q and CAPE. There has been little change in the underlying value of the market, but the rise in share prices has meant that non-financials are 74% overpriced according to q and listed shares, including financials, are 73% overpriced according to CAPE.
The calculations include the data published in Z1 Table B.102 as at 30th September, 2010, while that for CAPE includes the EPS on the S&P 500 up to the 30th June, 2010. The chart shows year end values, except for 10th December, 2010. (It should be noted that we use geometric rather than arithmetic means in our calculations).
Although the overvaluation of the stock market is well short of the extremes reached at previous year ends in 1929 and 1999, it has reached the other previous peaks of 1906, 1936 and 1968.
It should also be noted that, once the market become significantly overpriced, the degree of overvaluation rises rapidly with further increases in share prices. For example, a 20% rise in share prices, such as occurred from 30th June to 10th December, means that a market which was overvalued by 44% at the end of June will be overvalued by 73% today.
Data for our calculations of q are taken for 1900 to 1952 from Measures of Stock Market Value and Returns for the Non-financial Corporate Sector 1900 - 2002 by Stephen Wright, published in the Review of Income and Wealth (2004) and for 1952 to 2009 from the Flow of Funds Accounts for the United States (“Z1”) published by the Federal Reserve. Data for our calculations of CAPE are taken from the data published on Robert Shiller’s website.