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.

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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.

Posting the Quarterly Roundup on Monevator (Again)

There is no post today as I’m guest posting over on Monevator what is now a regular quarterly feature – The Monevator Private Investor Market Roundup.  The Roundup reviews various global markets over the last quarter and is in my usual non-emotional (well not too much emotion) fact based analysis and today covers equities, UK housing and commodities.  Some of the content is unique to the Roundup and is not available on Retirement Investing Today.

If this is of interest (and you are not a regular reader of Monevator) here is the link to The Monevator Private Investor Market Roundup for January 2013. ( ) While you’re there you might want to subscribe to Monevator via email, RSS, Twitter or Facebook as the team over there really do make a lot of sense.

As always it would be great to hear your thoughts.

Gold Priced in British Pounds (GBP or £’s) – January 2013 Update

This is the regular Gold Priced in Pound Sterling update.  The last update was in December 2012.

The chart below shows the Nominal Monthly Gold Price since 1979.  The key Nominal Gold metrics are:

• The Nominal Gold Price is currently £1,030.03 which is 1.3% below the December 2012 Price of £1,044.09.
• Year on Year Nominal Gold Prices are 3.5% below the January 2012 Price of £1,067.76.  

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The chart below then adjusts this chart by the continual devaluation of Sterling through inflation.  The key Real Monthly Gold Price metrics are:

• Real Gold Peak Price was £1,176.61 in January 1980.  At £1,030.03 we are 12.5% below that peak today.
• The long run average is £528.29 which is indicating a very large 95% potential overvaluation.
• The trendline indicates the Real Gold Price should today be £478 which would indicate even further overvaluation today.  

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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.    

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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?

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Investing for Income via Investment Trusts

I’m very pleased to introduce a post from Retirement Investing Today reader John Hulton. John claims to not be a financial guru, stockbroker or financial journalist, but just an average bloke who has managed to find a way through the minefields of personal finance, develop a system that works for him and which could be helpful for other people. He has already retired from full time work at the age of 55 and as he is now financially secure can afford to relax, spend more time pursuing his hobbies, managing his investments and pension. Or in short a perfect match for what this website is all about.  I hope you enjoy his thoughts.

In my ebook Slow & Steady Steps from Debt to Wealth I set out a step-by-step guide to generating income from the stockmarket. I have found, through a process of trial and error over several years, that a combination of individual higher yield shares together with a portfolio of investment trusts gets the job done for me.

In this post I will outline some of the benefits of investment trusts and at a later date, return to my shares portfolio.

I currently hold a core portfolio of 12 trusts which have been gradually built up over the past few years. They have been mainly purchased during periods of market downturns. The most recent buying spree was May 2012 when I purchased Invesco Income, Edinburgh, Temple Bar, Aberforth Smaller and topped up City of London and Murray International.

The mainstay of my portfolio is selected from the UK Income & Growth sector, however I like a well diversified range of investment trusts and include international orientated trusts as well as smaller companies and corporate bonds. Average return this past year including dividends was 21%. The column headed ‘Revenue Reserves’ gives some indication of the number of months the trust could continue to pay dividends even if the trust received no further income.

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Bearing in mind the total return from the FTSE 100 was around 10%, I am more than pleased with this year’s returns. Dividends have increased this year by an average of 5%. I suspect all managers are maintaining some degree of caution and therefore retaining income within the trusts as increases on my individual shares portfolio have increased around 11% this year. The main thing for me is whether the portfolio delivers sustainable dividend increases which are above inflation each year.

How to start a portfolio

As with any portfolio, your aims should be to get the right balance between risk and reward, to be clear about what you want to achieve and over what time span, and then to adopt the right approach when the portfolio is fully invested. Do lots of research around the trusts which are most likely to achieve your goals and, of course, take it slow & steady.

At the time of writing this article the FTSE has climbed above 6,000 (last seen in July 2011) and as you can see, the total return on my investment trusts have increased over 20% so I would certainly be a little more cautious if I were starting today. There may well be more favourable opportunities over the coming year when the markets turn down and yields improve.

Of course, over the longer term, market timing is not so important but it will obviously be a little disappointing to pile in with your lump sum and see the value of your portfolio drop 10% or even 20% over the next few months. In a rising market it is better to drip feed money into the market gradually. My online broker Sippdeal has the option of regular investing for just £1.50 per trade which means you can economically invest sums of say £250 per month whilst waiting for better opportunities down the line. You could easily use my portfolio above as a template portfolio of say £12,000 and as the basis for starting your research. A common theme with all 12 holdings is that they have excellent long term performance records relative to their benchmarks and, by and large, managers who have been in place for some time. For example, Job Curtis at City of London has been manager since 1991 (shortly after I started investing). The trust has a record of increasing dividends in each of the past 46 years.

There are many investment trusts which could just as well do the same job or better - these are the ones I have researched. I do not advocate lazily copying these trusts (however tempting) as it is an important step, in my opinion, to do your own research and take responsibility for your selections and decisions.

A good starting point of reference for research is The Association of Investment Companies and also Trustnet.