Covid crash #2 started

noClue

equity is expensive atm though, saying crash 50% at some point wouldn't be an understatement...

https://www.multpl.com/shiller-pe

Sailtheworld

London7766551 said:

I say the market will crash 60% by the end of January.  There you go a prediction and that would be a real crash! Also said it a month ago or so in the house crash thread. I stand by it and will happily get egg on my face.

What market? What was the valuation a month or so ago when the prediction started?

Out of interest what are you doing to prepare?

Alexland

noClue said:

equity is expensive atm though, saying crash 50% at some point wouldn't be an understatement...
https://www.multpl.com/shiller-pe

Yes equity earnings are expensive compared to what they used to cost but they are not looking expensive to what other miserable options for income and capital growth are currently available which has been supporting and driving asset prices for a long time.

Prism

noClue said:

equity is expensive atm though, saying crash 50% at some point wouldn't be an understatement...

https://www.multpl.com/shiller-pe

CAPE is only one way of several methods of valuing the market. It doesn't take into account the alternatives or interest rates which are a big factor in valuations.

Another_Saver

noClue said:

equity is expensive atm though, saying crash 50% at some point wouldn't be an understatement...

https://www.multpl.com/shiller-pe

Schiller himself admitted it is a terrible predictor of when crashes would happen, only that on its own, it's the least badly correlated with future returns of the measures people use.

noClue

Agree with you two, cape is just one measure...

what are the alternatives. would be interested to know....

itwasntme001

The Shiller PE or CAPE is commonly quoted for the S&P500 which currently seems to imply over valuation relative to history.  A CAPE for other markets outside of the US would probably suggest not nearly as "over-valued".  Some regions like UK and Japan would appear "under valued".

It has a very poor track record for predicting crashes in the short term but is a good predictor for long term under performance.  So must be used with care.

itwasntme001

Prism said:

noClue said:

equity is expensive atm though, saying crash 50% at some point wouldn't be an understatement...

https://www.multpl.com/shiller-pe

CAPE is only one way of several methods of valuing the market. It doesn't take into account the alternatives or interest rates which are a big factor in valuations.

The CAPE does take into account interest rates indirectly because the "P" used in the CAPE metric is simply the price of the S&P500 index at today's level.  The price of any asset like the S&P500 index is itself the discounted sum of future cash flows.  The discount rate used is a function of interest rates.  The market determines through buy and sell orders on a constant basis the price of the S&P500 so makes assumptions on cash flows and interest rates etc.

Prism

noClue said:

Agree with you two, cape is just one measure...

what are the alternatives. would be interested to know....

I'm not sure you can use the other ratio's as a market level assessment as it would require someone to calculate and average it. For example Macrotrends can give you ratio's like Free Cash Flow Yield and the various revenue/profits stats over a given time period. There are some custom calculations you can do like ROCE and ROIC but I doubt that many are collecting that together for a market average.

Then you have the investors who are basing the valuations of individual companies on 10-20 year predictions of growth - all that gets factored into the price and therefore the CAPE.

Oh and even if you do use CAPE or PE then I'm not convinced you can rely on the E (earnings per share). When a company buys back its own shares, as many US companies have been doing over the years, the earnings per share goes up and therefore the PE ratio goes down. Nothing inherently wrong with that, but it does mess up the ratio somewhat.

itwasntme001

Prism said:

noClue said:

Agree with you two, cape is just one measure...

what are the alternatives. would be interested to know....

I'm not sure you can use the other ratio's as a market level assessment as it would require someone to calculate and average it. For example Macrotrends can give you ratio's like Free Cash Flow Yield and the various revenue/profits stats over a given time period. There are some custom calculations you can do like ROCE and ROIC but I doubt that many are collecting that together for a market average.

Then you have the investors who are basing the valuations of individual companies on 10-20 year predictions of growth - all that gets factored into the price and therefore the CAPE.

Oh and even if you do use CAPE or PE then I'm not convinced you can rely on the E (earnings per share). When a company buys back its own shares, as many US companies have been doing over the years, the earnings per share goes up and therefore the PE ratio goes down. Nothing inherently wrong with that, but it does mess up the ratio somewhat.

I am not so sure that buybacks distorts the use of PE or CAPE.  Buybacks are simply just reinvestments back into the business at the required rate of return for its equity shareholders.  Not much different to investing the earnings (more accurately its free cash flows) into capital investments or other specific projects.  The price of the stock (and thus the PE) reflects whether or not these reinvestments (whether buybacks or otherwise) are expected to deliver higher rates of return on equity over time.  For example, to make it worthwhile, buying back stock for Microsoft at today's level using debt would require a return over and above the cost of debt (ignoring any tax advantages of the use of debt for simplicity) plus the equity required rate of return (= cost of equity).  Failure to meet this would have proven the buybacks as damaging to existing stock holders.