Not all CAPEs are heroes

Value metrics

Thanks for the small smattering of emails about the CAPE ratio :-)

A couple of things.

Firstly, it's definitely not a short-term market timing tool.

Nobody knows what happens to markets in the short term, and there ain't no measure can tell you that. 

Instead, it's a measure of value which makes a decent fist of predicting expected returns over the coming decade or two. 

As you can see from the tech wreck, even expensive markets can go higher (at least temporarily). 

Secondly, and moreover, trying to pick apart my point on CAPE to pieces is kind of missing my, erm, point.

Which is, if you run a range of measures they should roughly align and help you to build the overall picture (e.g. price to book, price to sales, etc.)

The S&P 500 dividend yield is now just 1.7%, for example, which given the abject lack of growth in earnings means that in aggregate real returns can probably only come from price speculation, not investing for income.

The S&P 500 dividend yield did go lower than this once since 1871 (from 1997 forth, in the lead up to the tech bubble).

Meanwhile, the price to sales ratio has just hit the highest level in history this week at 2.4x.

For context, this is actually higher than what we saw at the peak of tech bubble in 2000.

Source: Bloomie

It's worth having a think about what paying such an insane revenue multiple actually means about how you're valuing a business. 

It's all getting a bit nuts when you think about it. 

In early 2018 Caterpillar Inc (NYSE; CAT) was trading at 2.2x sales, and that didn't end well either.

Meanwhile, *fairly* upbeat sentiment abounds...

At 24x earnings Aussie industrials (ex-banks and REITS) are drifting into nascent bubble territory, even if the rest of the Aussie market isn't nearly so rampant.

Note that globally markets have become more correlated with the US, which is why we pay close attention to the S&P 500. 

Momentum means that the market keeps going higher, until it doesn't. 

Ergo, exercise caution!