Stockmarket valuation gauge moves into the red

According to one of the most reliable stockmarket indicators of value, US equities are looking overpriced.

One sign of a stockmarket party that has gone on too long is a stretched cyclically adjusted price/earnings (Cape) ratio. Cape has been among the most reliable valuation gauges in market history. While it's not a useful indicator of a crash or boom in the short term, history shows that the higher the Cape, the lower long-term returns are likely to be.

In the US, the Cape has reached 26, compared to an average over the past century of 16. It has spent over 90% of the past 134 years at a lower level, according to data from Deutsche Bank.

Only on two occasions has the S&P 500 been more expensive by this measure. Cape was marginally higher at the peak of the market in 2007. It reached 44 in 2000, an all-time high at the peak of the tech bubble. The previous high was 33 in 1929. At major bear-market bottoms, Cape has been in single digits.

So, the historically high Cape suggests equity investors are likely to struggle from here. It hardly helps matters that US profit margins are unusually high and thus likely to fall. The macroeconomic environment of the next few years is a further likely headwind. One key problem is demographics.

The growth rate of the US working-age population has collapsed from 7.3% in 1995-2000 to 2.1% today, as Deutsche points out. Debt remains historically high, while the rest of the world is still working off its hangover from the crisis. Add it all up and Deutsche reckons US stocks could lose an annual 0.9%, or 3.4% in real terms, over the next ten years.

Recommended

Why investment forecasting is futile
Investment gurus

Why investment forecasting is futile

Every year events prove that forecasting is futile and 2020 was no exception, says Bill Miller, chairman and chief investment officer of Miller Value …
21 Jan 2021
Why investors should beware of India’s surging stockmarket
Emerging markets

Why investors should beware of India’s surging stockmarket

The BSE Sensex benchmark index has soared by 90% since March, largely driven by foreign investors. But India's bull market is very vulnerable.
15 Jan 2021
US stocks are obviously in a bubble. But is it a rational bubble?
US stockmarkets

US stocks are obviously in a bubble. But is it a rational bubble?

Everyone wants to know if the US stockmarket is in a bubble. But that is the wrong question, says Merryn Somerset Webb. Of course it’s a bubble. The r…
14 Jan 2021
Yes US stocks are in a big bubble. But when will it burst?
US stockmarkets

Yes US stocks are in a big bubble. But when will it burst?

There are plenty of indicators to suggest that US stocks are in a massive bubble right now, says John Stepek. Here, he looks at what might pop it.
11 Jan 2021

Most Popular

Bitcoin: fool’s gold or the new gold?
Bitcoin

Bitcoin: fool’s gold or the new gold?

With bitcoin hitting new highs last week, and close to becoming a mainstream investment, is it really gold for the 21st century?
15 Jan 2021
Forget austerity – governments and central banks have no intention of cutting back
Global Economy

Forget austerity – governments and central banks have no intention of cutting back

Once the pandemic is over will we return to an era of austerity to pay for all the stimulus? Not likely, says John Stepek. The money will continue to …
15 Jan 2021
The MoneyWeek Podcast: bitcoin special
Bitcoin

The MoneyWeek Podcast: bitcoin special

Merryn talks to bitcoin experts Dominic Frisby and Charlie Morris to get the lowdown on the cryptocurrency to find out why it's such a huge global phe…
15 Jan 2021
Free 6 issue trial then continue to