Share prices are tumbling this week. And so they should. This is the Shiller price ratio for the S&P 500 in the US but the trend is universal:
The ratio compares inflation-adjusted earnings with price.
For more than a century the ratio was around 15, implying 6% expected returns.
Now it is 36, down from a peak, but still way out of line with reasonable expectations.
There is room for further falls.
All that QE money might be in for a bumpy ride.
Its good to see that someone else is keeping an eye on indicators like that.
With all the Covid related distractions and fascist-lite antics that have been going on the newsy people that know about the real indicators seem to have taken their eye off the ball.
Marco the Shiller index is widely available and seen by all market practitioners if they attach significance to it..it has little significance to growth industries and is misleading if you backtrack historically to periods where the money supply was constricted such as the gold standard and or pre QE
Nonsense
The fundamentals still stand
Oh, Charlie,
“Market practitioners” aren’t the ‘newsy folks’ I was talking about and “market practitioners” have a long history of wandering blindly into one bubble-and-crash after another. Most of the areas covered by the index aren’t “growth industries”, interest rates have a Zero Lower Bound and QE isn’t infinite (thank God). In fact central banks are presently tightening it up or under pressure to do so.
Its not as if QE was ever going to make P/E or any of the relevant indicators redundant. As Richard says “the fundamentals still stand” and, by definition, they always will.
These newsy folks (below) are more concerned about tightening QE and to the limited extent that they are looking at P/E ratios they are largely doing so for the wrong reasons with some of them more or less blaming central banks for a future fall in asset prices.
https://www.bloomberg.com/news/articles/2022-01-05/for-fed-taper-rates-then-quantitative-tightening-quicktake
https://www.betashares.com.au/insights/will-the-fed-sink-stocks/
https://www.washingtonpost.com/business/so-long-qe-im-sure-well-see-you-again-soon/2022/01/24/2b4f4b6e-7d6a-11ec-8cc8-b696564ba796_story.html
https://www.ft.com/content/da550a79-5284-4bc1-96f9-f0eb8b6fed33
Oops, I meant to write Quantitative Tightening not ‘tightening of QE’. Oh well, same thing. Its happening.
Richard/ Marco – the point being that 10, 20, 30yrs ago etc, investors could de risk by selling equities to own bonds / cash and still usually make a positive real return..post QE this isn’t possible and the reverse is true hence equities are swamped with an exodus from bond markets..the shiller index takes no account of the opportunity cost of owning equities.. so it is a weak tool when comparing time periods when the opportunity cost is significantly positive compared to when it is transformed to significantly negative.. it is also backward looking and naturally the stockmarket is forward looking and is discounting earnings growth.. this is pertinent now as many companies have suppressed earnings over the last 2 yrs and investors are expecting them to rebound. If they do then using the Shiller index equities will look less expensive.
The Shiller index is limited in its scope and what it can tell us
I disagree
36 times earnings is absurd when risk is taken into account
The index makes this clear
Indeed, share prices are falling. That said, there is a mssive need for investment. I do not like Mckinsey but they have a point here (article). There is no dodging it – collossal investment is needed. I wonder where it will all come from:
https://www.reuters.com/markets/commodities/bigger-spend-needed-net-zero-world-than-assumed-mckinsey-2022-01-25/
& what does this mean for Schiller price ratios? I’m not convinced that 15/6% is erm… sustainable….apologies 🙂
I agree