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CAPE Rising What To Do?

The Economist |Finance & economics| January 30th 2021, pp61|Buttonwood|”Time Warp” “Markets are frothy-but beware the siren call of market timing”


Read the article for all detail

Summary of the Article

Buy low and sell high a familiar adage if only there were tools to identify when to execute these actions. If there were these tools then all would follow and there would be no sellers for those that would buy as the stock falls etc. A parameter known as CAPE, cyclically adjusted price-earnings ratio, is watched closely by market-timers. Currently CAPE ratio stands at more than 30 historically behind only the late 1990s when the CAPE ratio reached more than 40 before falling dramatically. According to this article “Studies of timing, guided by valuation metrics such as the CAPE, show disappointing results compared with just buying and holding stocks for the duration.” With a high CAPE ratio it follows that future returns will be lower but currently, with interest rates at “-1% on the ten-year bond”, there aren’t other investing opportunities with similar liquidity. So, you might think logically that bond rates are likely to rise because inflation is likely to rise. That said negative bond rates in “Europe and Japan…have lasted far longer than many people thought possible.”

What to do?

“Paul Samuelson, a Nobel prizewinning economist and wit of post-war America” and “market timing” sceptic, would advise “Sell down your stockholdings to the sleeping point, where you can rest at night. Spread your bets widely across stocks and geographics-stock markets outside America have lower CAPE ratios and higher expected returns.”

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