Financial Mathematics Text

Tuesday, January 31, 2017

Alternative CAPE - Pre-Trump Update

In my post, CAPE - An Alternative Calculation and its followup CAPE Alternative - Update, I discussed an alternative method to average historical earnings which I suggested had some benefits while still remaining  in the spirit in which Benjamin Graham proposed (and Robert Shiller used) it. Today I'll be updating the calculation.

A correction.

But first there's a correction that needs to be pointed out which I apparently missed the first time around. The numbers I used for book value and earnings weren't comparable as the latter was inflation adjusted while the former was not. The result is much higher ROE figures. I hope to correct that today.

CAPE Alternative - Update


So here is the chart as of the end of September 2016 (pre-election):

Alternative CAPE

In terms of the current figures:

Alt-CAPE: 22.9
Yield: 4.4%
Average ROE: 12.0%

What do these numbers mean? I don't know. It certainly isn't 2009. And these are figures are prior to the post-election boom.

I'm inclined to think long-term returns on stocks will not be terribly great. Granted, I'm not convinced bonds will fare much better. But my magic ball is broken so. . .

All data collected from multpl.

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