15-20 was normal for the 100 years ending 40-50 years ago. But of we look at the last 40 years or so, the CAPE has been higher, suggesting that we don’t know how what “normal” looks like going forward. More people are buying stocks than ever before due to retirement plans and poor bond yields, which pushes up the PE.
So whether ~40 is high for a PE going forward isn’t clear. The CAPE hit ~45 in the 2000 crash, and reverted to ~20 after the crash, yet the 2008 crash only hit ~26 and crashed down to ~14 and quickly bounced back to ~20. The 2008 had little to do with CAPE and more to do with corruption in the banking industry, whereas 2000 was almost purely oversized hype in the burgeoning tech market.
So is the normal range 20-30? Idk. Maybe 20 is actually low going forward, it’s unclear. Either way, 40 isn’t as outlandish as it was in the 2000s, and that pushed up to 45 before crashing.
there is a strong likelihood we are seeing a bubble.
Agreed. But if you drop out of the market and invest in other stuff, you would miss whatever the rest of the runup will do before it bursts, which could leave you worse off than someone just investing in the entire market by market cap. Ot could continue to run for 10-20 years, or it could pop this year, it’s impossible to know since it relies heavily on investors continuing to believe the hype and companies continuing to have something to back up that hype.
I don’t think anyone should trust my numbers either. Here’s the CAPE data, make your own decision as to whether the CAPE ratio makes sense going forward.
CAPE is a weird measure in that it looks at last 10 years of earnings for PE ratio. It is not especially relevant in that a fair expectation for next year’s earnings is this year’s earnings. It is intriguing that there wasn’t significant earnings growth levels in the past, though, which because PE based on this year’s earnings would have high CAPE if high recent growth.
But of we look at the last 40 years or so, the CAPE has been higher, suggesting that we don’t know how what “normal” looks like going forward.
As you listed, crashes lead to sub 20 PEs. Mag7 PEs is not representative of Russel 2000 PEs. High PEs expect high growth for long period. Reality checks usually happen, but PE’s are not universally high. Just with the oligarchs with White House guest passes.
The 2000 crash didn’t though, it was just over 20 at the trough. Jan 2003 was 21. That was almost as high as the peak in the 60s, and higher than the moment before Black Monday. So the market reverted to a mean that would be considered a peak just 20-30 years prior. 15 used to be a good marker for “average,” and now that’s the marker for the Great Recession.
Crashes used to lead to sub-10s, and now they crash to 15-20. The market has fundamentally changed with 401ks and IRAs.
15-20 was normal for the 100 years ending 40-50 years ago. But of we look at the last 40 years or so, the CAPE has been higher, suggesting that we don’t know how what “normal” looks like going forward. More people are buying stocks than ever before due to retirement plans and poor bond yields, which pushes up the PE.
So whether ~40 is high for a PE going forward isn’t clear. The CAPE hit ~45 in the 2000 crash, and reverted to ~20 after the crash, yet the 2008 crash only hit ~26 and crashed down to ~14 and quickly bounced back to ~20. The 2008 had little to do with CAPE and more to do with corruption in the banking industry, whereas 2000 was almost purely oversized hype in the burgeoning tech market.
So is the normal range 20-30? Idk. Maybe 20 is actually low going forward, it’s unclear. Either way, 40 isn’t as outlandish as it was in the 2000s, and that pushed up to 45 before crashing.
Agreed. But if you drop out of the market and invest in other stuff, you would miss whatever the rest of the runup will do before it bursts, which could leave you worse off than someone just investing in the entire market by market cap. Ot could continue to run for 10-20 years, or it could pop this year, it’s impossible to know since it relies heavily on investors continuing to believe the hype and companies continuing to have something to back up that hype.
Valid, I got 15-20 from a Google search, but further research puts your numbers as more reasonable, I will edit the patent post.
I don’t think anyone should trust my numbers either. Here’s the CAPE data, make your own decision as to whether the CAPE ratio makes sense going forward.
CAPE is a weird measure in that it looks at last 10 years of earnings for PE ratio. It is not especially relevant in that a fair expectation for next year’s earnings is this year’s earnings. It is intriguing that there wasn’t significant earnings growth levels in the past, though, which because PE based on this year’s earnings would have high CAPE if high recent growth.
As you listed, crashes lead to sub 20 PEs. Mag7 PEs is not representative of Russel 2000 PEs. High PEs expect high growth for long period. Reality checks usually happen, but PE’s are not universally high. Just with the oligarchs with White House guest passes.
The 2000 crash didn’t though, it was just over 20 at the trough. Jan 2003 was 21. That was almost as high as the peak in the 60s, and higher than the moment before Black Monday. So the market reverted to a mean that would be considered a peak just 20-30 years prior. 15 used to be a good marker for “average,” and now that’s the marker for the Great Recession.
Crashes used to lead to sub-10s, and now they crash to 15-20. The market has fundamentally changed with 401ks and IRAs.