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Shiller P/E Now Implying Long Term Negative Market

November 05, 2013 | About:

Yale Prof. Robert Shiller won Nobel Price for his creation of Case-Shiller index. His cycle adjusted P/E ratio is also widely popular among value investors. GuruFocus has been tracking the daily P/E ratios , calculating the implied returns by the Shiller P/E ratio. We also extend the calculation to Shiller P/E of different sections of S&P 500 companies using the same method, trying to figure out which sectors are relatively cheap. Furthermore, we also apply the idea to individual companies and calculate the Shiller P/E for individual companies. For instance, this is the Shiller P/E ratio of Wal-Mart (NYSE:WMT).

With the stock market traded at all time highs, Shiller P/E now suggests that the market will return 1.5% a year over the next decade, including dividends. If we remove the 2% a year contribution from dividends, the return will be negative. This means that S&P 500 index itself will be lower 10 years from now than it is today.

Another lost decade?

This conclusion is similar to what we get from the ratio of total market cap over GDP, which is suggesting a 2.1% a year (including dividends) market return over the next decade.

The ratio of total market over GDP is now 113%, which is about where the market peaked at in Oct. 2007, right before the beginning of the market crash. The Shiller P/E actually provides a more optimistic picture. Currently it is lower than it was in Oct. 2007 by about 10%. This is caused by the higher profit margin over the last five years than the previous 5 years.

We have no way of knowing where the market will go over short term, or even long term, for that matter. Any bearish predictions of market in the last 5 years have been proven wrong. But we do observe that our list of Ben Graham Net-Net is drying up for the US market. In contrast to the US market, plenty can still be found in Asia.

Steven Romick, manager of FPA Crescent Fund, weathered the 2008 market crisis better than most of other investors, is having difficulties finding things to buy. He wrote in his latest shareholder letter: “We have found ourselves with little alternative but to make some sales… We'd like nothing more than to shift to a higher gear and increase our exposure, but given the lack of securities offering a genuine margin of safety, we're content to stay out of the fast lane for now.”

In a recent interview on CNBC, Warren Buffett said that stocks are fair valued to him, and he couldn’t find much to buy.

The last time when Warren Buffett said he couldn’t find things to buy was 2005. Stock market continued to roar up for another two years. In any cases, not a lot of bargains can be found. If you are searching for companies that will outperform the market average in a fully valued market, take a look at GuruFocus Buffett-Munger screener.

Sector Shiller P/E shows that energy sector is relatively cheap. It has a Shiller P/E of 15.4, compared with the general market Shiller P/E of 24.5. If you want to look into the energy sector, follow the All-In-One Screener link.

What will you do in this market? Sell some stocks and get prepared for the future opportunities, like Steven Romick, or "We all know this will end badly. But let's us make some money first," like Jim Cramer.

Rating: 4.6/5 (18 votes)


Sapporosteve premium member - 4 years ago
The US market has had 5 straight positive returns years since 2009, although 2011 just made it into positive territory.

5 straight positive years has been done only 6 times since 1925.

Six straight positive years has been done twice.

So an overvalued market and looking for 6 straight positive returns. I'm selling too as I think next year will be a negative return year.
AlbertaSunwapta - 4 years ago    Report SPAM
As I posted in the link below, a number of value funds/investors are finding it hard to find stocks priced with a margin of safety so as they sell stocks reaching their full or overvalued prices, these folks are raising cash. Others are hedging.

That said, few if any are mostly in cash.

Jtcolton - 4 years ago    Report SPAM
hedging to protect gains and not adding more to existing positions. took a short position on tesla at 175. Too much euphoria and not enough earnings. most of ibm's gains the last couple of years due to stock buy backs. when the inevitable correction comes, who will be the buyers and at what price. the downdraft could be brutal.

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