Are Stocks Expensive? Yes, but…

/Are Stocks Expensive? Yes, but…

Are Stocks Expensive? Yes, but…

Are stocks expensive? On an absolute basis, yes. As Greenbackd.com and Mebanefaber.com have recently pointed out, the Shiller P/E, or cyclically-adjusted P/E (CAPE), is at a historical high. We have the last reading at 22.65.

To keep tabs on CAPE and related measures, we built a new module in Turnkey to help investors quickly understand where returns might be heading. https://alpha.turnkeyanalyst.com/macroviews

First, we like to look at all returns on all assets in terms of yields. A P/E type ratio isn’t comparable to a bond yield or a dividend yield. However, the inverted P/E, or E/P, does mean something–it is essentially an “earnings” yield. The earnings yield is more comparable to other yields in the market place.

A simple question: How does the current real earnings yield (1/CAPE) stack up relative to historical real earnings yields?

At it stands as of 3/31/2013, the current real earnings yield is 4.4%, which sits at the ~13th percentile, historically.

In other words, stocks are very rich!

earnyield

A simple question: How does the current real earnings yield (1/CAPE) stack up relative to the real yield on 10-year government bonds?

As of 3/31/2013, the current real spread between stocks and bonds is ~4%, which sits at the ~53rd percentile, historically.

In other words, stock prices are not that expensive relative to bonds.

stocks

So what are investors to do? Bonds don’t offer much; stocks offer more; but no asset looks attractive.

“Solution:”
Cry in your pillow, wipe your tears with the cash you have lying under your bed, and hope for a market crash in the future.


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About the Author:

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.

7 Comments

  1. […] Stocks only look cheap relative to bonds.  (Turnkey Analyst) […]

  2. […] Analyst: – Are stocks expensive? Yes, but… –  A simple question: How does the current real earnings yield (1/CAPE) stack up relative to the […]

  3. Jason Carver June 14, 2014 at 12:34 pm

    How sensitive is the predicted return in https://alpha.turnkeyanalyst.com/macroviews to the length of holding? I am seeing more consistent results with a 15-year duration than a 10-year one.

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