Market Value | Slack Investor

Market Value – December 2024 Update

A few times a year, Slack Investor likes to take a snapshot of the markets using the Cyclically Adjusted Price to Earnings ratios (CAPE) – which use ten-year average inflation-adjusted earnings. He first started using CAPE as a ‘value’ tool in September 2021 and, the most recent post on Market Value was for the end of May 2024. That was 6 months ago and, probably due to the strange ‘Donald 2.0’ effect, the US and Australian markets have powered on since then.

There are some critics of CAPE as a predictive tool. However, there is some good research that links CAPE to future returns … and future returns are what Slack Investor is all about.

Shiller P/E and S&P 500 10-year annualised forward returns from 1983. There is a clear relationship between higher CAPE and lower expected 10-yr returns for the S&P 500. Data valid as of 31 December 2023 – Investco

The CAPE (cyclically adjusted PE) ratio is not a useful timing signal for market turning points, but is a powerful predictor of long-term market returns.
Research Affiliates

For the following charts, Slack Investor uses monthly CAPE data from Barclays, the 40-yr mean is calculated and plotted together with the latest CAPE values – up till the end of November 2024. A ‘fair value’ zone is created in green where the CAPE is within one standard deviation of the mean (average) – click images for better resolution.

ASX 200 CAPE Value 23.0 (12% above long-term av.)

ASX CAPE values – up till the **end of November 2024**

FTSE 100 CAPE Value 16.3 (7% below long-term av.)

UK CAPE values – up till the **end of November 2024**

S&P 500 CAPE Value 37.7 (52% above long-term av.)

US CAPE values – up till the **end of November 2024**

What is Slack Investor doing about the high US market values?

Not much. The predictive skill of the Schiller CAPE is not very good over 1-yr and 5-yr periods. It does show some skill for periods of 10 years and longer. This poses the question – should he withdraw his investments and just wait out the next ten years? Not likely! Time in the market is what matters.

The CAPE ratio is a helpful way for Slack Investor to look at the current state of the markets – it doesn’t change his approach to investing. He will just stick to his guns with his tried and true investment strategy.

Invest in a range of companies using ETF’s or a portfolio of at least 15 stocks.
For the individual stocks, continually monitor these investments to make sure that they still have some competitive advantages (e.g. A Moat), generate sustainable profits, they are continuing to grow and predicted to grow further.

These type of companies should do OK over most market cycles.

Slack Greetings from the UK – an ode to English Pubs

Slack Investor is not really much of a cold season traveller but he is here in the UK for some family business. England in winter is pretty grim with short days and cold weather. However, there is joy in slipping into a great English pub with a fire going and conversation everywhere. Experience tells me that most English pubs are good. But, he wasn’t just in any pub – Slack Investor was drinking at the RAF bar of The Eagle in Cambridge. Famous for being the pub where Francis Crick and James Watson (based on the work of Rosalind Franklin and others) celebrated and announced the double helix structure of DNA in 1953. Long live the English Pub.

The Eagle, Cambridge, UK. Long live the English Pub.

Market Value – End of May 2024 … and Travel Navigation

The Jeweller’s Bounty (1918) – Daniel Cortes

A few times a year, Slack Investor likes to take a snapshot of the markets using the Cyclically Adjusted Price to Earnings ratios (CAPE) which use ten-year average inflation-adjusted earnings. I first started using CAPE as a “value” tool in September 2021 and, my most recent look was for the end of January 2024. I have decided to do this CAPE market value analysis every few months.

Jeremy Grantham is a well known and astute investor and he argues that recent globalization has benefited the profitability of US companies and that their is good reason for an increasing CAPE trend in the US markets. However, there is some good research that links CAPE to future returns.

The CAPE (cyclically adjusted PE) ratio is not a useful timing signal for market turning points, but is a powerful predictor of long-term market returns
Research Affiliates

By plotting this CAPE over a period of time, we can look at how the whole sharemarket is currently valued in terms of historical data – this way we can track the whole share market as it oscillates between overvalued and undervalued. According to Research Affiliates, CAPE offers a negative correlation with subsequent 10-year and 20-year stock market returns – the higher the current CAPE, the lower are the expected future returns.

For the following charts, I use monthly CAPE data from Barclays, the 40-yr mean is calculated and plotted together with the latest CAPE values – up till the end of May 2024. A “fair value” zone is created in green where the CAPE is within one standard deviation of the mean (average) – click images for better resolution.

The US market remains the outlier here at 37% above its long-term value. Slack Investor is no guru, but, it doesn’t make sense to him to invest new money into a “frothy” whole-market index like the S&P 500 – at the moment!

ASX 200 Value (4% above long-term value)

FTSE 100 Value (4% below long-term value)

S&P 500 Value (37% above long-term value)

Slack Greetings from Provence – plus Navigational Tips

Evening view of the Luberon Valley, from Bonnieux, Provence. France

Slack Investor is in Europe at the moment (Boo … Hiss!), I have just finished a walking holiday in Provence, France. All I can say is that – it is a beautiful part of the world.

Steeped in history and preserved in that remarkable French way that respects the past. We moved around the intricate roads and paths using a fantastic bit of Android/IOS/Windows software called Komoot. The software is free to download on your phone with one local region – and, I added world maps for a one-time lifetime fee of $30 USD about 10 years ago – It was the best money I have ever spent, as I use the app daily. You can plot “tours” that are based upon the comprehensive “Open Street Maps” network which lists all the tiny paths and tracks that rarely appear in Google Maps. The output is best used on your phone – but the app is easier to plan using the desktop version of your Komoot account. I have no financial interest in any of the products that Slack Investor sometimes rambles on about.

**Google Maps** output for the area 5km east of Gordes, Provence, France – great for roads and business locations

**Komoot** output for the area 5km east of Gordes, Provence, France – Great for smaller roads and footpaths (tracks). The footpaths are shown as black lines and the blue line is our journey out from Gordes on the way to Roussillon.

Market Value – February 2024

A few times a year, Slack Investor likes to take a snapshot of the markets using the Cyclically Adjusted Price to Earnings ratios (CAPE) which use ten-year average inflation-adjusted earnings. I first started using CAPE as a “value” tool in September 2021 and, my most recent look was in mid-November 2023. I have decided to do this CAPE market value analysis every 3 months – as I like to keep a feel of where we are – as the market cycles. The next update will be in mid-May 2024.

Using monthly CAPE data from Barclays, the 40-yr mean is calculated and plotted together with the CAPE values. A “fair value” zone is created in green where the CAPE is within one standard deviation of the mean (average).

ASX 200 Value

*Historic CAPE ratios for the ASX 200 – From 1982 to end of January 2024 – Click the chart for better resolution.*

FTSE 100 Value

*Historic CAPE ratios for the FTSE 100 – From 1982 to end of January 2024– Click the chart for better resolution.*

S&P 500 Value

*Historic CAPE ratios for the S&P 500 – From 1982 to end of January 2024 – Click the chart for better resolution.*

At the end of January 2023, the FTSE 100 (11% below the 40-yr average) is the only followed market “ON SALE”. I love a price reduction!

The ASX 100 (4% above the 40-yr average) is in the “Fair Value” zone. However, the S&P 500 still looks well overvalued at 32% above the 40-yr average – and has just moved above the “Fair Value” zone.