US vs UK vs Aus Equity Valuations

The largest country equity holding within my portfolio is my home country, the United Kingdom, at 20.4% of total portfolio value.  This is then followed by Australian equities at 10.1% (a mistake I've mentioned numerous times previously) and then US equities at a relatively paltry 4.5%.  The Equity markets of these three countries make one third of my portfolio and so their performance (particularly that of the UK) matters.

My total portfolio year to date is under water by a few percent and since I started my DIY journey to FIRE (financially independent retired early) in late 2007 I've only managed a real (after inflation) annualised 3%.  Looking at the data what is clear is that to date I have backed the wrong horse.  Let’s take a look.

Firstly the US S&P500:

Click to enlarge, S&P500 Price Performance, Source: Yahoo Finance

Now the UK FTSE100:

Click to enlarge, FTSE100 Price Performance, Source: Yahoo Finance

And finally the Australian ASX200:

Click to enlarge, ASX200 Price Performance, Source: Yahoo Finance

Year to date the S&P500 is down 2.3%.  In comparison the FTSE100 is down 9.3% and the ASX200 is down 7.0%.

The S&P 500 Cyclically Adjusted Price Earnings Ratio (S&P500 CAPE) Update - August 2013

This is the monthly review of the S&P500 including a couple of S&P 500 valuation metrics.  The last review can be found here.

S&P500 Price

At market close on Friday the S&P500 was Priced at 1,691.  That is a rise of 1.4% when compared with 1,669, which is the average closing Price of each trading day last month.  It is 20.5% above last year’s August monthly Price of 1,403.  Note that for this index I only look at monthly average Prices as opposed to hourly or daily as I’m a very long term investor and just don’t need the noise associated with more granularity.  I’ll leave that for the traders out there.

We can then look at how this Price compares to history which is shown in the chart below.

Click to enlarge

This is a similar chart to that which you will see in many places within the mainstream media when displayed over a long term.  It looks sensational and in my opinion isn’t very helpful.  Let’s therefore adjust it to the chart below where I try to show what is really going on with Prices.  I make two adjustments:

• Correct the chart for the devaluation of the US Dollar through inflation.  
• Show the Pricing on a logarithmic scale as opposed to a linear one.  By using this scale percentage changes in price appear the same.  For example let’s say we have two historic prices of 10 and 100.  If they both increase in price by 10% then they increase by 1 and 10 respectively.  On a linear scale it would appear as though the second has increased by a factor of 10 more than the first where on a logarithmic scale they will appear to have changes the same.  Less sensational but more correct. 

Click to enlarge

The S&P 500 Cyclically Adjusted Price Earnings Ratio (S&P500 CAPE) Update - June 2013

This is the monthly review of the S&P500 including a couple of S&P 500 valuation metrics.  Last month’s review can be found here.

S&P500 Price

At market close on Friday the S&P500 was Priced at 1,627.  That is a fall of 0.8% when compared with 1,640, which is the average closing Price of each trading day last month.  It is 22.9% above last year’s June monthly Price of 1,323.  Note that for this index I only look at monthly average Prices as opposed to hourly or daily as I’m a very long term investor and just don’t need the noise associated with more granularity.  I’ll leave that for the traders out there.

We can then look at how this Price compares to history which is shown in the chart below.

Click to enlarge

This is a similar chart to that which you will see in many places within the mainstream media when displayed over a long term.  It looks sensational and in my opinion isn’t very helpful.  Let’s therefore adjust it to the chart below where I try to show what is really going on with Prices.  I make two adjustments:

• Correct the chart for the devaluation of the US Dollar through inflation.  
• Show the Pricing on a logarithmic scale as opposed to a linear one.  By using this scale percentage changes in price appear the same.  For example let’s say we have two historic prices of 10 and 100.  If they both increase in price by 10% then they increase by 1 and 10 respectively.  On a linear scale it would appear as though the second has increased by a factor of 10 more than the first where on a logarithmic scale they will appear to have changes the same.  Less sensational but more correct. 

Click to enlarge

S&P500 Earnings

As Reported Nominal Annual Earnings (using a combination of actual and estimated earnings) are currently $90.96.  That compares with this time last year at $87.92 implying earnings growth of 3.5% year on year.  Or course this looks better than it really is as inflation flatters the result.  I therefore plot a chart below, again on a logarithmic axis, showing Real (inflation adjusted) Earnings performance over the long term.

The New S&P 500 Cyclically Adjusted Price Earnings Ratio (S&P500 CAPE) Update - April 2013

I've been publishing a review of the S&P500 and all its nuances every month for over 3 years.  This is data that I personally use for my own investments and as my knowledge has grown so too has the content posted but the format has remained largely unchanged.  I've received no complaints but to me the format has now grown a little unwieldy, not as clear as it could be and probably most importantly I've become a little bored with it.  Last month’s review can be found here.  I've therefore spent some time reformatting the charts, adding some more relevant historical content and hopefully arranging the content into something a little more logical.  I hope it works for you.

S&P500 Price

At market close on Friday the S&P500 was Priced at 1,555.  That is a rise of 0.3% when compared with 1,551, which is the average closing Price of each trading day last month.  It is 12.2% above last year’s April monthly Price of 1,386.  Note that for this index I only look at monthly average Prices as opposed to hourly or daily as I'm a very long term investor and just don’t need the noise associated with more granularity.  I’ll leave that for the traders out there.

We can then look at how this Price compares to history which is shown in the chart below.

Click to enlarge

This is a similar chart to that which you will see in many places within the mainstream media when displayed over a long term.  It looks sensational and in my opinion isn’t very helpful.  Let’s therefore adjust it to the chart below where I try to show what is really going on with Prices.  I make two adjustments:

• Correct the chart for the devaluation of the US Dollar through inflation.  This unfortunately means, unlike the mainstream media in recent times, I can’t report that the S&P500 has reached new all time highs as in real terms it is still 22.5% below the Real high reached in August 2000.
• Show the Pricing on a logarithmic scale as opposed to a linear one.  By using this scale percentage changes in price appear the same.  For example let’s say we have two historic prices of 10 and 100.  If they both increase in price by 10% then they increase by 1 and 10 respectively.  On a linear scale it would appear as though the second has increased by a factor of 10 more than the first where on a logarithmic scale they will appear to have changes the same.  Less sensational but more correct. 

Click to enlarge

The S&P 500 Cyclically Adjusted PE (aka S&P 500 or Shiller PE10 or CAPE) – March 2013 Update

With the mainstream media this week reporting new nominal highs for the Dow Jones Industrial Average lets also run our own regular analysis of the US market to get some detail on what is really going on in this market.   As always instead of the Dow, which only looks at 30 large companies, we’ll turn our attention to the S&P500 which looks at 500 leading public companies.  Last month’s update can be found here.

Before we crunch the numbers it’s worth pointing out that while titles like Asian markets climb after Dow Jones hits record high make for great headlines, I can’t help but feel that this is misleading the general public as they might actually think that the market is at new highs.  Of course regular readers will know that Dow isn’t at a new Real (inflation adjusted) high, but only at Nominal highs, as the unit of measure that the Dow and S&P500 is measured in, the US Dollar, is constantly being devalued through inflation.  When it comes to the S&P500, the Real high was way back in 2000 and we are still some 22.5% below that level.  

Let’s now look at the key S&P 500 metrics:

• The S&P 500 Price is currently 1,543 which is a rise of 2.0% on last month’s Price of 1,512 and 11.1% above this time last year’s monthly Price of 1,389.
• The S&P 500 Dividend Yield is currently 2.0%.
• The S&P As Reported Earnings (using a combination of actual and estimated earnings) are currently $89.63 for an Earnings Yield of 5.8%.
• The S&P 500 P/E Ratio is currently 17.2 which is up from last month’s 17.0.

The first chart below provides a historic view of the Real (inflation adjusted) S&P 500 Price and the S&P 500 P/E.  The second chart below provides a historic view of the Real (after inflation) Earnings and Real (after inflation) Dividends for the S&P 500.

Click to enlarge

The S&P 500 Cyclically Adjusted PE (aka S&P 500 or Shiller PE10 or CAPE) – February 2013 Update

The US stock market has seen some large gains since New Year’s Eve. As I write this post the mid market price for the S&P500 is down 0.9% on the day at 1,499.8 but still up 5.2% in little over a month. Similarly, the Dow Jones is down 0.8% at 13,903.5 but is up 6.1% since the market close on the 31 December 2012. It’s therefore appropriate to run the standard Retirement Investing Today monthly update for the S&P500 Cyclically Adjusted PE (S&P 500 CAPE). Let’s see if the market is just exuberant or starting to head towards Irrational Exuberance.  Last month’s update can be found here.

As usual before we look at the CAPE let us first look at other key S&P 500 metrics:

• The S&P 500 Price is currently 1,500 which is a rise of 1.3% on last month’s average close of 1,480 and 13.3% above this time last year’s monthly Price of 1,324.
• The S&P 500 Dividend Yield is currently 2.1%.
• The S&P As Reported Earnings (using a combination of actual and estimated earnings) are currently $88.85 for an Earnings Yield of 5.9%.
• The S&P 500 P/E Ratio is currently 16.9 which is up from last month’s 16.8.

The first chart below provides a historic view of the Real (inflation adjusted) S&P 500 Price and the S&P 500 P/E.  The second chart below provides a historic view of the Real (after inflation) Earnings and Real (after inflation) Dividends for the S&P 500.

Click to enlarge

Click to enlarge

As always let us now turn our attention to the metric that this post is interested in which is the Shiller PE10.  This is also shown in the first chart which dates back to 1881 and is effectively an S&P 500 cyclically adjusted PE or CAPE for short.  This method is used and was made famous by Professor Robert Shiller.  It is simply the ratio of Real (ie after inflation) S&P 500 Monthly Prices to 10 Year Real (ie after inflation) Average Earnings. 

The S&P 500 Cyclically Adjusted PE (aka S&P 500 or Shiller PE10 or CAPE) – January 2013 Update

This is the Retirement Investing Today monthly update for the S&P500 Cyclically Adjusted PE (S&P 500 CAPE).  Last month’s update can be found here.

As usual before we look at the CAPE let us first look at other key S&P 500 metrics:

• The S&P 500 Price is currently 1,461 which is a rise of 2.7% on last month’s Price of 1,422 and 12.3% above this time last year’s monthly Price of 1,301.
• The S&P 500 Dividend Yield is currently 2.1%.
• The S&P As Reported Earnings (using a combination of actual and estimated earnings) are currently $87.55 for an Earnings Yield of 6.0%.
• The S&P 500 P/E Ratio is currently 16.7 which is up from last month’s 16.3.

The first chart below provides a historic view of the Real (inflation adjusted) S&P 500 Price and the S&P 500 P/E.  The second chart below provides a historic view of the Real (after inflation) Earnings and Real (after inflation) Dividends for the S&P 500.

Click to enlarge

Click to enlarge

As always let us now turn our attention to the metric that this post is interested in which is the Shiller PE10.  This is also shown in the first chart which dates back to 1881 and is effectively an S&P 500 cyclically adjusted PE or CAPE for short.  This method is used and was made famous by Professor Robert Shiller.  It is simply the ratio of Real (ie after inflation) S&P 500 Monthly Prices to 10 Year Real (ie after inflation) Average Earnings. 

It is important to highlight that my calculation method varies from that of Professor Shiller.  He only uses S&P 500 Actual Earnings data where because I use the S&P 500 PE10 to actually make investment decisions from I also include extrapolated Earnings estimates right up to the present day.  This is to try and make the value as current as possible.

The Fiscal Cliff and Severe Real S&P500 Bear Markets – January 2013 Update

With the US Government this week deciding that it was going to make no attempt to at least start the country along the road towards living within its means, the so called Fiscal Cliff was avoided.  In response the S&P500 rose 4.0% in the week to close at 1,466.  While the main stream media were getting all excited about this increase I started to think about how this continual kicking of the can down the road could actually be storing up future problems, which might actually prolong the Severe Real S&P500 Bear Market I believe we may still find ourselves within.  I last posted about this analysis in September 2012.  As a reminder I define a Severe S&P500 Bear Market as a period in time where from the stock market reaching a new Real (inflation adjusted) high it then proceeded to lose in excess of 60% of its real Value.

The previous Severe Real S&P500 Bear Markets are revealed in the chart below which corrects historic S&P500 Prices since 1881 by the devaluation of the US Dollar to arrive at Real Prices.  This chart shows we are now back to Prices last seen in March 1998 and also shows we have seen three previous Severe Real Bear Markets.    

Click to enlarge

If I think of the US Government putting off this unpopular decision for another day then at some time in the future the bond market may force them to make a decision.  Of course at that time they will then have somebody else to blame which will suit the weak politicians whose only focus seems to be to get themselves re-elected.  The subsequent rise in taxes and cuts to spending which would then follow would then have to be worse than they were faced with today because through indecision they have made the problem a larger one to solve. The S&P 500 may then respond with a big fall which brings me back to the chart above.  Now there is of course a risk that I’ve been looking at this chart too long however I can generally see in the last 3 Severe Bear Markets two lower Real highs following the initial new Real high.  From this second lower Real high we then see Real Prices fall between 40 and 60%.  Are we are nearing that second lower high and could this government indecision actually end up causing this next big leg down?  Of course I would never buy or sell based on this hypothesis because the market can remain irrational far longer than I can remain solvent.

If I overlay the three Severe S&P Bear Markets with today’s market by comparing the percentage change in value from the peak for each of these periods we arrive at today’s second chart.  So what were these previous bear markets?

Click to enlarge

The S&P 500 Cyclically Adjusted PE (aka S&P 500 or Shiller PE10 or CAPE) – December 2012 Update

This is the Retirement Investing Today monthly update for the S&P500 Cyclically Adjusted PE (S&P 500 CAPE).  Last month’s update can be found here.

As usual before we look at the CAPE let us first look at other key S&P 500 metrics:

• The S&P 500 Price is currently 1,417 which is a rise of 1.6% on last month’s Price of 1,395 and 14.0% above this time last year’s monthly Price of 1,243.
• The S&P 500 Dividend Yield is currently 2.1%.
• The S&P As Reported Earnings (using a combination of actual and estimated earnings) are currently $87.77 for an Earnings Yield of 6.2%.
• The S&P 500 P/E Ratio is currently 16.1 which is down from last month’s 16.0.

The first chart below provides a historic view of the Real (inflation adjusted) S&P 500 Price and the S&P 500 P/E.  The second chart below provides a historic view of the Real (after inflation) Earnings and Real (after inflation) Dividends for the S&P 500.

Click to enlarge

Click to enlarge

The S&P 500 Cyclically Adjusted PE (aka S&P 500 or Shiller PE10 or CAPE) – November 2012 Update

This is the Retirement Investing Today monthly update for the S&P500 Cyclically Adjusted PE (S&P 500 CAPE).  Last month’s update can be found here.

As usual before we look at the CAPE let us first look at other key S&P 500 metrics:

• The S&P 500 Price is currently 1,360 which is a fall of 5.4% on last month’s Price of 1,438 and 10.9% above this time last year’s Price of 1,226.
• The S&P 500 Dividend Yield is currently 2.2%.
• The S&P As Reported Earnings (using a combination of actual and estimated earnings) are currently $88.20 for an Earnings Yield of 6.5%.
• The S&P 500 P/E Ratio is currently 15.4 which is down from last month’s 16.4.

The first chart below provides a historic view of the Real (inflation adjusted) S&P 500 Price and the S&P 500 P/E.  The second chart provides a historic view of the Real (after inflation) Earnings and Real (after inflation) Dividends for the S&P 500.

 

 Click to enlarge

The S&P 500 Cyclically Adjusted PE (aka S&P 500 or Shiller PE10 or CAPE) – October 2012 Update

This is the Retirement Investing Today monthly update for the S&P500 Cyclically Adjusted PE (S&P 500 CAPE).  Last month’s update can be found here.

As usual before we look at the CAPE let us first look at other key S&P 500 metrics:

• The S&P 500 Price is currently 1,435 which is 0.6% below last month’s Price of 1,443 and 18.8% above this time last year’s Price of 1,207.
• The S&P 500 Dividend Yield is currently 1.97%.
• The S&P As Reported Earnings (using a combination of actual and estimated earnings) are currently $88.87 for an Earnings Yield of 6.2%.
• The S&P 500 P/E Ratio is currently 16.2 which is down from last month’s 16.3.

The Dow has not reached 5 year highs (Severe Real S&P500 Bear Markets) – September 2012

I admit that over the past few weeks the US stock market has been a little bullish and has put on some good short term gains.  I however have not been excited by what I have been seeing.  The press however seem to be exactly the opposite.  We’ve seen headlines like Dow Closes at 5-year high, Market milestone: Stocks return to late 2007 level and even the US version of The Motley Fool telling us How the Dow reached a 5-year high.

It really is unfortunate that we live in an era where not even the press feel the need to report facts and can get away with such sloppy journalism.  Firstly, in nominal terms the Dow Jones Industrial Average (DJIA) has not reached a 5 year high.  According to Google Finance within the last 5 years in nominal terms the best DJIA close we have seen has been 14,164 on the 09 October 2007.  In comparison in this recent bull market the best close we have seen has been 13,596 on the 20 September 2012.  I make that a gap of 4.0% so not what I would call a high.  The full 5 year story can be seen in my first chart which comes from Yahoo Finance.

 5 Year Nominal DJIA Chart (Click to enlarge)

The S&P 500 Cyclically Adjusted PE (aka S&P 500 or Shiller PE10 or CAPE) – September 2012 Update

Stock markets today provided big rises after Mario Draghi announced that he plans to buy up the debt of his favourite PIGS.  The German DAX rose 2.9%, France’s CAC 40 rose 3.1%, the UK’s FTSE 100 was up 2.1% and the Spanish IBEX was up a large 4.9%.  Positive market responses were not limited to Europe with the US S&P 500 also up 1.9% as I write this post. 

Given these market moves let’s look at the Retirement Investing Today monthly update for the S&P500 Cyclically Adjusted PE (S&P 500 CAPE).  Last month’s update can be found here.

Before we look at the CAPE let us first look at other key S&P 500 metrics:

• The S&P 500 Price is currently 1,430 which is 1.9% above last month’s Price of 1,403 and 21.8% above this time last year’s Price of 1,174.
• The S&P 500 Dividend Yield is currently 1.98%.
• The S&P As Reported Earnings (using a combination of actual and estimated earnings) are currently $88.59 for an Earnings Yield of 6.2%.
• The S&P 500 P/E Ratio is currently 16.1 which is up from last month’s 15.9.

The S&P 500 Cyclically Adjusted PE (aka S&P 500 or Shiller PE10 or CAPE) – August 2012 Update

This is the Retirement Investing Today monthly update for the S&P500 Cyclically Adjusted PE (S&P 500 CAPE).  Last month’s update can be found here.

Before we look at the CAPE let us first look at other key S&P 500 metrics:

• The S&P 500 Price is currently 1,406 which is 3.4% above last month’s Price of 1,360 and 18.6% above this time last year’s Price of 1,185.
• The S&P 500 Dividend Yield is currently 2.01%.
• The S&P As Reported Earnings (using a combination of actual and estimated earnings) are currently $90.02.
• The S&P 500 P/E Ratio is currently 15.6 which is up from last month’s 15.2.

The S&P 500 Cyclically Adjusted PE (aka S&P 500 or Shiller PE10 or CAPE) – July 2012 Update

This is the Retirement Investing Today monthly update for the S&P500 Cyclically Adjusted PE (S&P 500 CAPE).  Last month’s update can be found here.

Before we look at the CAPE let us first look at other key S&P 500 metrics:
-    The S&P 500 Price is currently 1,341 which is 1.3% above last month’s Price of 1,328.
-    The S&P 500 Dividend Yield is currently 2.11%.
-    The S&P As Reported Earnings (using a combination of actual and estimated earnings) are currently $93.25.
-    The S&P 500 P/E Ratio is currently 14.4 which is up slightly from last month’s 14.3.

The S&P 500 Cyclically Adjusted PE (aka S&P 500 or Shiller PE10 or CAPE) – June 2012 Update

The S&P 500 closed on Friday at 1,335.  By my calculations I also have as Reported Earnings (using a combination of actual and estimated earnings) at $92.33.  Combining these two pieces of data gives us an S&P 500 P/E Ratio of 14.5. 

While interesting, for my own investment purposes, I do not use the P/E ratio.  Instead I use what I have called the Shiller PE10 which is shown in my first chart (effectively an S&P 500 cyclically adjusted PE or CAPE for short).  This method is used and was made famous by Professor Robert Shiller.  It is simply the ratio of Real (ie after inflation) S&P 500 Monthly Prices to 10 Year Real (ie after inflation) Average Earnings.

Severe Real S&P500 Bear Markets – June 2012 Update

As I write this post the S&P 500 is trading at 1,322.  If I correct for the devaluation of the US Dollar over the years (ie correct for inflation) we were at this value back in July 1997.  So in 15 years the value of companies in the S&P 500 have gone precisely nowhere.  Sure, as a private investor you would have been paid dividends over this period, but they have only averaged around 1.8% annually, making it pretty difficult to try and save for retirement.

My first chart today shows 3 periods in the US stock market since 1881 when similar conditions have prevailed.  I call these the historic severe bear markets and they are periods in time where from the stock market reaching a new high it then proceeded to lose in excess of  60% of its real (inflation adjusted) value.  The percentage change in value from the peak for each of these periods in time are shown in my second chart.  So what were these bear markets?

The S&P 500 Cyclically Adjusted PE (aka S&P 500 or Shiller PE10 or CAPE) – May 2012 Update

As I write this post the S&P 500 is priced at 1,310.  By my calculations I have current earnings at $91.4 for an S&P 500 P/E Ratio of 14.3.  The earnings I use are as Reported Earnings, as opposed to the much more ambitious Operating Earnings, as I believe these are a much more appropriate (and conservative) measure.  As a quick reminder Reported Earnings will typically always be lower than Operating Earnings as they include the cost of non-recurring items such litigation charges, costs of shutting a factory and good will write downs to name but three.  Now it’s only my humble opinion, but I believe these are real and true costs incurred by the business, even if they are non-recurring and so badly want to be excluded by the “Company Bean Counters”. 

Let me also be clear on how I calculate the Reported Earnings.  I am using the Earnings as published by Standard and Poors.  At the time of writing they have published:

• Actuals for quarter end 30 June 2011, 30 September 2011 and 31 December 2011;
• A hybrid of 98.7% actual with the remaining as estimates for quarter end 31 March 2012; and
• An estimate for quarter end 30 June 2012

I then extrapolate these figures to cover a year to the end of May 2012.

Irrational Exuberance and LinkedIn – History of Severe Real S&P 500 Stock Bear Markets – May 2011 Update

I couldn’t believe my eyes yesterday when LinkedIn (LNKD) had its flotation on the stock market.  All that I could think of during the day was irrational exuberance, the market can remain irrational longer than you can remain solvent and how quickly people forget.  For those that missed it LinkedIn floated at $45 per share which valued the company at $4.25B.  With earnings last year of $15.4M I calculate that as a Price Earnings (PE) ratio of 276.  That was shocking enough when you think that the long run cyclically adjusted PE (CAPE or PE10) for the S&P500 is 16.4.  However what I couldn’t believe was that during the days trading somebody or something (High Frequency Trading?) paid $122.70 a share for a PE ratio of 752 which is 46X the S&P500 PE10 long run average.  To me as an Average Joe this sounds like the dotcom days all over again.  The amazing thing is that it looks like plenty of others have already forgotten about the dotcom boom and its after affects in around 11 years and what’s even more amazing is that as I show today in Real (inflation adjusted terms) the market is still some 31.4% below the S&P500 real high of August 2000.  So we haven’t even recovered from the last lot of irrational exuberance.

The S&P 500 cyclically adjusted PE (S&P500 PE10 or S&P500 CAPE) – May 2011 Update

Today I update the last May 2011 period cyclically adjusted PE ratio that I track – the S&P500 CAPE.   As I say every time I post on this index I am using this ratio to try and squeeze some extra performance out of my portfolio.  This method is used by Professor Robert Shiller however I modify it slightly by incorporating forecast earnings up to the month of interest. For new readers some background information on the CAPE is available here and if you’d like some information on why I use the CAPE then that is available here.