Howdy, Stranger!

It looks like you're new here. If you want to get involved, click one of these buttons!

In this Discussion

Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

    Support MFO

  • Donate through PayPal

CAPE Fear: The Bulls Are Wrong. Shiller's Measure Is the Real Deal

edited February 2019 in Fund Discussions
This article discusses why the author thinks an inflection point has been reached that will begin to draw the P/E ratio back down towards long term historic norms. The focus on interest rate trends ties into the argument Gundlach makes in a video I posted a few minutes ago....
Here’s the problem that the CAPE highlights. Earnings in the past two decades have been far outpacing GDP; in the current decade, they’ve beaten growth in national income by 1.2 points (3.2% versus 2%). That’s a reversal of long-term trends. Over our entire 60 year period, GDP rose at 3.3% annually, and profits trailed by 1.3 points, advancing at just 2%. So the rationale that P/Es are modest is based on the assumption that today’s earnings aren’t unusually high at all, and should continue growing from here, on a trajectory that outstrips national income.It won’t happen. It’s true that total corporate profits follow GDP over the long term, though they fluctuate above and below that benchmark along the way. Right now, earnings constitute an unusually higher share of national income. That’s because record-low interest rates have restrained cost of borrowing for the past several years, and companies have managed to produce more cars, steel and semiconductors while shedding workers and holding raises to a minimum. Now, rates are rising and so it pay and employment, forces that will crimp profits...The huge gap between the official PE of 19 and the CAPE at 30 signals that unsustainably high profits are artificially depressing the former and that profits are bound to stagnate at best, and more likely decline. The retreat appears to have already started.


  • Actually, CAPE is wrong. CAPE can be off by years so why use it. Sure, eventually stocks will be down at some point, they always are. There is no indicator that can predict when prices reach tops or bottoms so the best way IMO to use a mechanical method.
    The easiest way is using asset allocation rebalance. Suppose you have 60/40 stock/bonds, when they are off by 5% just rebalance. No need to listen or follow any adice/experts/indicators.

    I use the following for years since portfolio preservation is the most important to me because I just need 4.5% annual return for the next several decades.
    The only indicator that works in real time, 100% guarantee, must relate to the price. Here is my simple formula. When the price of the SP500 goes under 50 days MA(moving average) and stay there several days I reduce my stocks % to under 5%, when the price goes under 200 days MA my stocks % to under 2%. Then the reverse.
    So, how did the above work last time? Since the top at 09/2018 to today, my portfolio is up more than 3%. Last year, when the SP500 lost 20%, my portfolio lost just -0.9%. My portfolio volatility on the worse days was only 5-10% of the SP500.
  • @FD1000

    >> Last year, when the SP500 lost 20%

    Not seeing that. When was that exactly?
  • @davidrmoran. Lost 20.5% from it's 9/20 high to it's 12/24 low.
  • @FD1000 what is your upper limit of stocks since you are in preservation mode? If MA goes below 50-200 day you toggle from 5 to 2%AA in stocks? 2-5% seems like it may as well be 0%. Of course if those are individual stocks...something with large upside or large capital gains I can see holding on. I am interested in trend following so using MA is interesting to me. Regards,Mike
  • Thanks!! I use it. Only with a 10% sleeve of my investments.
  • Generally, I'm at 10-15% in stocks but I can be up to 30-40% in certain times for several days. This can happen when SPY goes down and rebound, I watch the MACD, it has to go to negative(around -50) and rebound, I buy on the first positive day and sell after several days, it has a very high success rate(chart).
  • Interesting.
  • Thanks. What does MACD stand more? Looks like moving average...deviation....something?
  • And the answer is: Learn how to use Moving Average Convergence Divergence (MACD) in your trading decisions.
  • MACD is one of the most used technical analysis indicators. To finds everything on T/A used the same site, see a direct (link)
Sign In or Register to comment.