Sunday 15 May 2011

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.

The first 3 charts that I present today cover the data that I analyse every month.   My 1st chart plots the Shiller S&P 500 CAPE which is now 22.9.  This is up from 21.7 when I last looked at this data back in November 2010.  The dataset average for the Shiller S&P500 CAPE is 16.4 which assuming this is “fair value” indicates that the S&P500 is now some 39% overvalued.   My mechanical tactical asset investment strategy forces me to take action no matter what.  With the increase in this PE10 my UK Equities target asset allocation decreases to 16.5% (nominal based on buy & hold would be 20.5%) and my International Equities target asset allocation decreases to 12.1% (nominal based on buy & hold would be 15%).  

The reason why I use the Shiller S&P 500 PE10 is shown in my 2nd chart.  The correlation with the Real (ie after inflation) S&P 500 Price is currently 0.78.  This can also be seen on the chart which shows the CAPE versus 1 year real return, which while having a low R^2, shows a loose trend, particularly as the PE10’s get large (ie very over valued).

My 3rd chart plots Real (after inflation) Earnings and Real Dividends for the S&P 500.  Earnings continue to grow with forecast earnings for the period ending 30 June 2011 now expected to be $86.43.

My 4th chart today is what I am now finding intriguing.  This is an overlay of the FTSE100 CAPE, the ASX200 CAPE and the Shiller S&P500 CAPE since 1993 and shows the current CAPE’s at 14.4, 16.6 and 22.9 respectively.  What I find interesting is that since 2001 the FTSE100 has been consistently tracking below both the ASX200 and the S&P500.  Is the FTSE100 undervalued and due some out performance?  Additionally as we saw during the dotcom boom the S&P500 seems to be diverging from the ASX200.  Are we about to see a repeat of the divergence we saw during the dotcom era indicating the S&P500 Price is about to “run away”?  To be honest, I have no idea and I’m happy to say my strategy doesn’t rely on me knowing.

As always do your own research.

Assumptions include:
-         - Prices are month averages except May ‘11 which is the 13 May ’11 S&P 500 stock market closing price.
-         - January ’11 to May ’11 reported earnings are estimates from Standard & Poors.  S&P has June  2011 annual earnings estimated at $86.43. 
-         - Inflation data from the Bureau of Labor Statistics.  April and May ‘11 inflation is extrapolated.
-         - April and May ‘11 dividends are estimated as the March ‘11 dividend.
-         - Historic data provided from Professor Shiller website.

1 comment:

  1. Interesting blog - glad to have come across it

    One question though, why are you not using simple averages on your charts rather than trend lines please?