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 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 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 key S&P 500 PE10 metrics are:
- The S&P 500 PE 10 is currently 21.6 which is 2.8% above last month’s 21.0.
- The correlation between the Nominal S&P500 Price and the S&P 500 PE10 from present day back to 1881 is 0.66. This correlation one reason why I use this metric to make investment decisions from.
- The Dataset Average S&P 500 PE10 which dates back to 1881 is 16.5. Assuming this is “fair value” it indicates that the S&P500 is still some 31% overvalued.
- The Dataset Median S&P PE10 is 15.9.
- The Dataset 20th Percentile S&P 500 PE10 is 11.0.
- The Dataset 80th Percentile S&P 500 PE10 is 20.9.
The chart below further highlights why I use the Shiller PE10 to drive a tactical portion of my Retirement Investing Today asset allocation which is stacked on top of a basic strategic asset allocation. This shows a chart of the S&P 500 vs the Nominal 5 Year Total Return from January 1881 through to July 2007. The correlation is -0.46 with an R^2 of 0.21. This implies that there is a partial correlation between the S&P 500 PE10 and future returns from the market. With the PE10 at 21.6 the trendline implies a future Nominal 5 Year Total Return of 37%. In contrast the Real (inflation adjusted) 5 Year Total Return (not shown in any chart today) trendline implies a return of 23%.
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So what of my Retirement Investing Today portfolio. Regular readers will know that I use the above PE10 data to set my allocation to the International Equities portion of my portfolio. This is strategically set at 15% of total assets and is targeted to consist of 40% US Equities, 40% Europe Equities and 20% Japan Equities. I then add the S&P500 PE10 tactical spin on top of this with a target of 10.5% allocation should the PE10 climb to 26.5 (Average PE10+10) or 19.5% should the PE10 fall to 6.5 (Average PE10-10). Therefore today my tactical allocation sets itself below 15% at 12.7%.
As always do your own research.
- Prices are month averages except August ‘12 which is a 10 August ’12 S&P 500 market close Price.
- July and August ‘12 Dividend is assumed to be equal to the June ’12 Dividend
- April ’12 to August ’12 reported earnings are estimates from Standard & Poor’s.
- Inflation data from the Bureau of Labor Statistics. July and August ‘12 inflation is extrapolated.
- Historic data provided from Professor Shiller website.