Chart Of The Year – CAPE Index Signals Negative S&P 500 Returns To 2030

Each year, it seems there is only one candidate for Chart of the Year. And 2020 is no exception. It has to be the CAPE Index developed by Nobel Prize winner, Prof Robert Shiller.  As the chart shows, it is nearly at an all-time high with Tesla’s addition to the S&P 500. Only the peak of the dot-com bubble in 2000 was higher.

Last year’s Chart of the Decade was an early warning of problems ahead, showing how the S&P 500 had seen its longest-ever run without a 20% downturn. And the bubble duly began to burst in March. But then the US Federal Reserve rushed to its rescue, as it has done continually since 2009, based on the concept of then-Fed Chairman, Ben Bernanke that:

“Higher stock prices will boost consumer wealth and help increase confidence“.

Of course, this is nonsense as we have seen since 2009. But for the moment, the Fed feels it would look stupid if it suddenly went back to William McChesney Martin’s policy that it should instead:

“Take away the punchbowl as the party gets going”.

But at some point, the Fed will realize it cannot challenge 150 years of S&P history.

Rule No 1 of famous market guru, Bob Farrell, is that “Markets tend to return to the mean over time”.  And today the CAPE (Cyclically Adjusted Price/Earnings) Index, is even above 1929’s level.

INVESTORS ARE AT PEAK EUPHORIA

The S&P has already seen a V-shaped recovery since March, due to the combination of furlough money and stimulus. Investors are now expecting more of the same:

  • They assume Janet Yellen’s arrival as Treasury Secretary will lead to even more of Friedman’s ‘helicopter money’ being handed out to the general population
  • They are also confident that US Federal Reserve Chairman, Jay Powell, will continue to pump out $tns in stimulus support to financial markets

Their confidence would be remarkable at the best of times, but it is extraordinary today given the dire state of the economy, with lockdowns continuing:

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Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this ...

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