Note to Self: America's Equities Are Worth 20% Less than They Were Worth Three Months Ago...
Note to Self: America's equities are worth 20% less than they were worth three months ago. Needless to say, the only change in fundamentals between then and now is... that now investors in the stock market are no longer as optimistic or risk tolerant. Risk-free rates going forward are the same. Expected future productivity levels are the same. The curvature of individuals' utility functions as their wealth increase is the same...
Worth noting is that the Campbell-Shiller CAPE is 26. Worth noting is that that CAPE assumes that we have 2009-10-class earnings collapse once a decade. Assuming that a 2009-10 is a once-in-fifty years episode gets you to an adjusted CAPE of 23.5:
That is its average for the past 40 years. And given that nominal interest rates and real interest rates are secularly low, we would expect to see a CAPE higher than average. A CAPE of 23.5 gives us an expected forward real return of 4.3%/year in the absence of future changes in valuation ratios, and what other asset class is offering anywhere near that? A valuation ratio below the generational historical average, no competing prospects in other asset classes, and a batshit incompetent and insane American president—well, we understand why the adjusted CAPE is only 23.5, what we do not understand is why it was 28.2 three months ago...
