CAPE Fear

[AdrianC]

New article by Rob Arnott et al.

https://www.advisorperspectives.com/commentaries/2018/01/05/cape-fear-why-cape-naysayers-are-wrong

The usual Research Affiliates take: US market CAPE is high and predicts low forward returns of 3.5% real or less. Developed international and Emerging markets are cheaper and offer higher forward returns.

[khizr]

For a really good breakdown on the other side of the spectrum, and why cape doesn't matter... :)

https://www.researchaffiliates.com/en_us/publications/articles/645-cape-fear-why-cape-naysayers-are-wrong.html

Just wanted to share, as we do not know and both sides have some good points.

[Indexer]

For a really good breakdown on the other side of the spectrum, and why cape doesn't matter... :)

https://www.researchaffiliates.com/en_us/publications/articles/645-cape-fear-why-cape-naysayers-are-wrong.html

Just wanted to share, as we do not know and both sides have some good points.

Maybe I'm missing something, but you posted the exact same article he did. Same title, same authors, just a different website.


CAPE isn't the only metric saying that stocks are overvalued in comparison to most of history. My FIRE calculations assume we will see lower than average returns the next 5-10 years. Hopefully it turns out better, and then I could FIRE even sooner.

[khizr]

For a really good breakdown on the other side of the spectrum, and why cape doesn't matter... :)

https://www.researchaffiliates.com/en_us/publications/articles/645-cape-fear-why-cape-naysayers-are-wrong.html

Just wanted to share, as we do not know and both sides have some good points.

Maybe I'm missing something, but you posted the exact same article he did. Same title, same authors, just a different website.


CAPE isn't the only metric saying that stocks are overvalued in comparison to most of history. My FIRE calculations assume we will see lower than average returns the next 5-10 years. Hopefully it turns out better, and then I could FIRE even sooner.

Doh, copy-paste failure :)

Ya, I am not saying there are not other signals saying that market returns will be lower, just worth a read for the breakdown on why cape in the modern age might not be as an accurate signal as it once was. Mostly focused around these reasons:
1. Changes to how earnings are defined, esp with GAAP.
2. Changes to how goodwill is accounted for.
3. The change from favoring dividends to buybacks and other uses of cash.

Few others but that seems to be the big stuff...

Specific article I was trying to post:
http://www.philosophicaleconomics.com/2013/12/shiller/


Big list of resources:
http://mebfaber.com/2014/08/22/everything-you-need-to-know-about-the-cape-ratio/

[AdrianC]

Here’s the latest from Jeremy Grantham:

Bracing Yourself for a Possible Near-Term Melt-Up
(A Very Personal View)

https://www.gmo.com/docs/default-source/research-and-commentary/strategies/asset-allocation/viewpoints---bracing-yourself-for-a-possible-near-term-melt-up.pdf?sfvrsn=2

[Zamboni]

Ah . . . fear and greed, greed and fear . . . no matter what position you want to take on the market, someone will back you up!

[khizr]

Here’s the latest from Jeremy Grantham:

Bracing Yourself for a Possible Near-Term Melt-Up
(A Very Personal View)

https://www.gmo.com/docs/default-source/research-and-commentary/strategies/asset-allocation/viewpoints---bracing-yourself-for-a-possible-near-term-melt-up.pdf?sfvrsn=2

wow great read, thank you for sharing that!

[AdrianC]

Big list of resources:
http://mebfaber.com/2014/08/22/everything-you-need-to-know-about-the-cape-ratio/

Interesting that the first resource on that list is:

“Is the CAPE ratio good at predicting future returns? (Yes) Is it perfect? (N0)“

Also interesting that Meb Faber and the Philosophical Economics writer both have promoted trend following as a way to limit drawdowns. I just saw that Ben Carlson (and Rithoholz?) also now use trend following. Party like it’s 1999!

[AdrianC]

Ah . . . fear and greed, greed and fear . . . no matter what position you want to take on the market, someone will back you up!

Be fearful when others are greedy?

[khizr]

Ah . . . fear and greed, greed and fear . . . no matter what position you want to take on the market, someone will back you up!

Be fearful when others are greedy?

hah, i always like someone who told me are you in the stock market because you are invested in the company, or invested in other people being stupid. Very diff strategies :)

[BTDretire]

Here’s the latest from Jeremy Grantham:

Bracing Yourself for a Possible Near-Term Melt-Up
(A Very Personal View)

https://www.gmo.com/docs/default-source/research-and-commentary/strategies/asset-allocation/viewpoints---bracing-yourself-for-a-possible-near-term-melt-up.pdf?sfvrsn=2

wow great read, thank you for sharing that!

I would love to have all of the market downturn correlations listed in the article put on a site
to follow on a regular basis. At 62, I would like a little heads up or a reason to lighten my stock holdings. But for now I'm hanging on.