S&P 500 overlaid with Shiller PE ratio
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Hello all, thanks for viewing.
After re-reading William Poundstone's "How to Predict the Unpredictable" I thought I would chart the Shiller PE ratio on the S&P 500. I did this because I have general feeling is that things are a little over-extended.
In his book, he points out that in the past 130 years, if people in the US stockmarket had sold their stocks (and invested in cash instruments) when Shiller P/E rose above 28 and bought in again when it dipped below 13 would have avoided the 2 most significant market crashes in that time, thus magnifying their year-on-year returns. He also discussed other PE limits, which involve more active trading and greater returns.
Please forgive the inaccuracy of my overlay, I tried to place the data points as accurately as possible for February and August each year (multpl.com/shiller-pe/table?f=m). From this data PE rose above 28 in December 2016 / Jan 2017 and has remained above that level. My knowledge of equities isn't that strong but I do understand that when PE ratios grow, there is less money to share among investors and dividends shrink. When PE ratios get towards the higher end, investors may come to rely more on growth in capital gains as the main source of returns. This may add more volatility into the market. Increased volatility has been detected since 28 was exceeded: marketwatch.com/story/the-dow-and-sp-500-have-already-doubled-the-number-of-1-moves-seen-in-all-of-2017-2018-03-26. If competing investments come to be more attractive due to increased interest rates and / or low risk instruments then there may be capital outflows from equities.
Maybe I am a "glass half empty" kind of guy but when I hear multiple reports of "the longest bull-run in history but also read parallel analysis that the market is undervalued (marketwatch.com/story/guess-which-of-these-sp-500-valuation-measures-is-telling-the-truth-2018-04-20) my first reaction is to get sceptical.
Disclaimer (for those that need one); I am not a professional, a financial adviser, or your Mom, so please do your own research. This is published for my own education and I have no position in the US market and am not considering taking one. The market is currently in an upswing. There is no way of telling how long the market will continue up for.
After re-reading William Poundstone's "How to Predict the Unpredictable" I thought I would chart the Shiller PE ratio on the S&P 500. I did this because I have general feeling is that things are a little over-extended.
In his book, he points out that in the past 130 years, if people in the US stockmarket had sold their stocks (and invested in cash instruments) when Shiller P/E rose above 28 and bought in again when it dipped below 13 would have avoided the 2 most significant market crashes in that time, thus magnifying their year-on-year returns. He also discussed other PE limits, which involve more active trading and greater returns.
Please forgive the inaccuracy of my overlay, I tried to place the data points as accurately as possible for February and August each year (multpl.com/shiller-pe/table?f=m). From this data PE rose above 28 in December 2016 / Jan 2017 and has remained above that level. My knowledge of equities isn't that strong but I do understand that when PE ratios grow, there is less money to share among investors and dividends shrink. When PE ratios get towards the higher end, investors may come to rely more on growth in capital gains as the main source of returns. This may add more volatility into the market. Increased volatility has been detected since 28 was exceeded: marketwatch.com/story/the-dow-and-sp-500-have-already-doubled-the-number-of-1-moves-seen-in-all-of-2017-2018-03-26. If competing investments come to be more attractive due to increased interest rates and / or low risk instruments then there may be capital outflows from equities.
Maybe I am a "glass half empty" kind of guy but when I hear multiple reports of "the longest bull-run in history but also read parallel analysis that the market is undervalued (marketwatch.com/story/guess-which-of-these-sp-500-valuation-measures-is-telling-the-truth-2018-04-20) my first reaction is to get sceptical.
Disclaimer (for those that need one); I am not a professional, a financial adviser, or your Mom, so please do your own research. This is published for my own education and I have no position in the US market and am not considering taking one. The market is currently in an upswing. There is no way of telling how long the market will continue up for.
ملاحظة
Correction: He doesn't recommend selling as soon as the PE ratio heads north of 28, but rather when its is both above 28 and then down-trends from whatever the high is that it reached. He used an arbitrary 6% down from the peak in one example. These conditions haven't eventuated.تم فتح الصفقة
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Comment: multpl.com/shiller-pe/table?f=m Update for October 24th 2018 29.96 which is 11%+ down from the Jan 2018 high of 33.31. The requirements have been exceeded for a S&P sell signal.ملاحظة
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Even though Poundstone's idea did not identify the absolute top of the market - it did identify the best time to exit equities and enter bonds. If you had sold all equities (or sold down) and invested in bonds - you would have bought 10 year US treasuries at 3.08 - 3.21 yield - basically the highest yield in the last 5 years. Those bonds would be worth a lot more than you paid for them now.
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