Valuing the UK Equities Market (FTSE 100) - May 2015

My investment strategy requires me to moderate my equity holdings based upon my view of current equity market values.  I run this valuation monthly for the Australian (currently targeting 15.5% of total portfolio value at current valuation vs 17% at fair value), US (as a proxy for my international equities and currently targeting 10.4% vs 15%) and UK (currently targeting 19.0% vs 20%) Equity markets.  Let’s look at the UK Equity market in more detail.

Firstly nominal values.  Between yesterday and the 1st April 2015 (“month on month”) prices are up 3.3% and since the 1st May 2014 (“year on year”) prices are also up 3.3%.

Chart of the FTSE 100 Price, Click to enlarge

Regular readers will know I’m not a fan of this type of chart as:

• the unit of measure, £’s, is being constantly devalued through inflation (although in the current market one wonders for how much longer); plus
• Pricing should be plotted on a logarithmic scale as opposed to a linear one as by using this scale percentage changes in Price appear the same.  

So let’s correct the chart for the devaluation of the £ through inflation (I use the Consumer Price Index (CPI) here) and convert to a log chart.  This normalised chart shows that Friday’s FTSE 100 Price of 7,031 is actually still 25% below the Real high of 9,331 seen in October 2000.  We’re also still 14% below the last Real cycle high of 8,164 seen in June 2007.

Chart of the Real FTSE100 Price, Click to enlarge

Valuing the UK Equities Market (FTSE 100) - February 2015

I have an investment strategy that requires me to moderate my equity holdings based upon my view of current equity market values.  I run this valuation monthly for the Australian, US and UK Equity markets.  While I run it monthly I've just realised that I haven’t shared that analysis for the UK market for 4 months now.  So without further ado let’s run the numbers for all to see.

Firstly nominal values.  Between yesterday and the 2nd February 2015 (month on month) prices are up 5% and since the 3rd February 2014 (year on year) prices are up 6.3%.

 Click to enlarge

Regular readers will know I'm not a fan of this type of chart as:

• the unit of measure, £’s, is being constantly devalued through inflation (although in the current market one wonders for how much longer); plus
• Pricing should be plotted on a logarithmic scale as opposed to a linear one as by using this scale percentage changes in Price appear the same.  

So let’s correct the chart for the devaluation of the £ through inflation (I use the Consumer Price Index (CPI) here) and convert to a log chart.  This normalised chart shows that Friday’s FTSE 100 Price of 6,874 is actually still 26% below the Real high of 9,317 seen in October 2000.  We’re also still 23% below the last Real cycle high of 8,152 seen in June 2007.  We are therefore a long way from previous highs.

Click to enlarge

Valuing the UK Stock Market (FTSE 100) - October 2014

Over the past couple of weeks the mainstream media have been getting all excited about recent share price falls.  As a group of people who are paid to write stuff I guess you could easily get excited by a graph like this:

Click to enlarge, Source: Yahoo Finance

Eyeball this short term chart and of course they’re right.  Over the past 6 or so weeks there is no denying the FTSE100 has fallen 8% or so.  Personally, as a long term investor with a mechanical investment strategy I ignore it all and simply think that markets go up and they go down.  This is more the view I’m interested in looking at:

Click to enlarge, Source: Yahoo Finance

On this scale the recent pull back is a bit of noise that means nothing more than my next share purchase is likely to be made at a better valuation than it was going to be.  Providing of course that earnings hold up.  Given I’ve now mentioned the valuation word as investors let’s today spend some time valuing the FTSE 100 over the longer term rather than wasting our time on short term price movement discussions.

Firstly let’s normalise the data by:

• Correcting the chart for the devaluation of the £ through inflation.  For this dataset I use the Consumer Price Index (CPI) to devalue the £.
• Plotting the Pricing on a logarithmic scale as opposed to a linear one.  By using this scale percentage changes in price appear the same.  

The normalised dataset shows that Friday’s FTSE 100 Price is actually still 32% below the Real high of 9,339 seen in October 2000.  We’re also now 23% below the last Real cycle high of 8,171 seen in June 2007.  We are therefore a long way from previous highs.

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 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 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.

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.

Interest rates at 0% haven’t worked, QE hasn’t worked, will QE Lite - S&P 500 cyclically adjusted PE (PE10 or CAPE) – August 2010 Update

In an attempt to try and force a recovery in the US the Federal Reserve have decided that they will undertake “QE Lite” which will entail using the proceeds from maturing mortgage bonds, which were bought using Quantitative Easing (money printing in my books), to now buy long dated government debt. I guess they are hoping that this will force bond yields down further which will reduce borrowing costs across the board for the average punter. I’m thinking two things:

US (S&P 500) stock market including the cyclically adjusted price earnings ratio (PE10 or CAPE) – April 2010 Update

To try and squeeze some more performance out of a retirement investing strategy that is heavily focused on buy & hold and asset allocation I am using a Cyclically Adjusted Price / Average 10 Year Earnings (PE10 or CAPE) ratio for the S&P 500 to value the US (specifically the S&P 500) stock market. The method used is that developed by Yale Professor Robert Shiller however I also incorporate earnings estimates up to the PE10 month of interest. Background information here.

Are we back to blowing asset bubbles already?

Last week saw Alan Greenspan interviewed as part of the Financial Crisis Inquiry Commission. The Times reported that during this interview “Mr Greenspan denied his policies encouraged the type of risky lending that spurred the financial crisis. The long-time Fed Chairman - whose reputation has been deeply undermined by the crisis - denied low interest rates and loose regulation had encouraged lenders and borrowers to take ever greater risks."

Australian Stock Market – March 2010 Update

To try and squeeze some more performance out of a retirement investing strategy that is heavily focused on asset allocation I am using a cyclically adjusted PE ratio (known as the PE10 or CAPE) for the ASX 200 to attempt to value the Australian Stock Market. The method used is based on that developed by Yale Professor Robert Shiller for the S&P 500. I will call it the ASX 200 PE10 and it is the ratio of Real (ie after inflation) Monthly Prices and the 10 Year Real (ie after inflation) Average Earnings. For my Australian Equities I will use a nominal ASX 200 PE10 value of 16 to equate to when I hold 21% Australian Equities. On a linear scale I will target 30% less stocks when the ASX 200 PE10 = 26 and will own 30% more stocks when the ASX 200 PE10 = 6.

US (S&P 500) Stock Market – March 2010 Update

To try and squeeze some more performance out of a retirement investing strategy that is heavily focused on buy & hold and asset allocation I am using a Cyclically Adjusted Price / Average 10 Year Earnings (PE10 or CAPE) ratio for the S&P 500 to value the US (specifically the S&P 500) stock market. The method used is that developed by Yale Professor Robert Shiller however I also incorporate earnings estimates up to the PE10 month of interest. Background information here.

US (S&P 500) Stock Market – February 2010 Update

To try and squeeze some more performance out of a retirement investing strategy that is heavily focused on asset allocation I am using a Cyclically Adjusted Price / Average 10 Year Earnings (PE10 or CAPE) ratio for the S&P 500 to value the US (specifically the S&P 500) stock market. The method used is that developed by Yale Professor Robert Shiller. Background information here.

Chart 1 plots the Shiller PE10. Key points this month are:

Shiller PE10 = 19.9 which is down from 20.6 last month. My UK Equities target asset allocation therefore increases from 18.6% to 18.8%. Additionally my International Equities target asset allocation increases from 13.3% to 13.4%.

Shiller PE10 Average (1881 to Present) = 16.4. This means we are currently still 21% higher than the long run average since 1881.

Shiller PE10 20 Percentile (1881 to Present) = 11.0

Shiller PE10 80 Percentile (1881 to Present) = 20.6. The Shiller PE10 has now fallen back through the 80 Percentile.

Shiller PE10 Correlation with Real (ie after inflation) S&P 500 Price = 0.78

Chart 2 further reinforces why I am using this method. While the R^2 is low there appears to be a trend suggesting that the return in the following year is dependent on the Shiller PE10 value. Using the trend line with a PE10 of 19.9 results in a 1 year expected real (after inflation) earnings projection of 5.2%.

Chart 3 plots Real (after inflation) Earnings and Real Dividends for the S&P 500. Real Dividends are still falling however they are still above their long term trend. Real Earnings have a roller coaster ride continually, particularly since about 1990. If the Standard and Poors forecast earnings are to be believed however we continue to be above the long term earnings trend and climbing.

Assumptions include:
- Q4 ’09 & Q1 ’10 earnings are estimates from Standard & Poors.
- Inflation data from the Bureau of Labor Statistics. January & February ‘10 inflation is extrapolated.
- January & February ‘10 dividends are estimated as December ‘09 dividend.
- Prices are month averages except February ‘10 which is the 11 February ’10 S&P 500 stock market at 1430.
- Historic data provided from Professor Shiller website.

As always DYOR.