Rare Sell Signal As Everyone Is Invested

Valuations: Let’s Go Back Further!

The CAPE ratio is very unpopular right now. It’s probably less popular than investing in value stocks or shorting story stocks. It has been shoved away as something that doesn’t work. The CAPE ratio has never been a market timing tool, but since it hasn’t worked for a few years, investors have given up on it. Technically, even after the financial crisis in 2009, the stock market wasn’t extremely cheap. It bottomed slightly below the long term median. However, in the past few decades it has made sense to buy US stocks almost all the time unless valuations are extremely high. Instead of using it as a buy signal, some investors just buy all the time and only use it as a rare sell signal that goes off once every couple of decades.

The current Shiller PE ratio is 37.15 which is well over double the median of 15.82. This is one of those once in a generation moments that the Shiller PE ratio is screaming to sell stocks. They should underperform over the next 10 years. Generally, stocks don’t plateau; they fall sharply. However, low single digits returns in the next 10 years aren’t great either. This chart adds in data from 1800 to 1870 which we are sure is going to anger some readers. Investors don’t think data from before 1980 is relevant. We have never in history had such a long stretch of elevated valuations. Is this the new normal?

Everyone Is Invested

Stocks are near a record percentage of household asset which is exactly in line with how elevated valuations are. One difference in this chart is that the peaks in the late 1960s, late 1990s, and now almost all line up. In the CAPE chart, the bubble in the late 1990s was much more elevated than the one in the late 1960s.

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Disclaimer: The content in this article is for general informational and entertainment purposes only and should not be construed as financial advice. You agree that any decision you make will be ...

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