What happened to Shiller CAPE #SPPE10

Why does the data for the Shiller CAPE ratio #SPPE10 end in 2014?


It was loaded once from his website . We never automated the process to keep it up to date since this is the first time anybody asked for it.

Please keep it alive. It is also available from FRED.

I made some of my own CAPE-10s. They’d be hard to share because they have dependencies on custom variables that you’d also have to map.

The true CAPE-10 emulator starts in 2009 bc that’s the first time we have access to 10 years of historical earnings for SP500.

When we try to recreate the time series from individual company fundamentals, we get a time series for the cyclically adjusted earnings of companies that are in the index now, not of those that were in the index for the past 10 years.

I hope that makes sense.

Graham/Shiller PE-10

I wholeheartedly agree with GEOV and would like to see the PE-10 data updated and maintained each week, if possible. That would be great!

I don’t understand what you mean, David. Why would the S&P 500 not have an earning record prior to 1999? Or am I missing something?

Standard & Poor’s was founded in 1860 and created a “Composite Index” as their original index. The “Composite Index” was renamed and introduced as the “S&P 500 Index” in 1923. The S&P 500 wasn’t composed of a full 500 stocks until 1957, but predecessor companies were assigned retroactively, to make the index representative of the early years. It’s something akin to what P123 does in extending ETFs back earlier than their actual inception by creating ‘synthetic’ prices based on the underlying index.

The real name of the ‘PE-10’ should be the “Graham/Shiller PE-10” and Shiller rightly and honorably gives credit to Benjamin Graham, author of “The Intelligent Investor” (he was also Warren Buffett’s mentor) as the originator of the PE-10 concept all the way back in 1943. I remember reading Graham’s advice about the prudence of using five and 10-year, inflation-adjusted earnings averages all the way back in the mid-1970s when I first opened “The Intelligent Investor” at 16.

In fact, in the latest edition of The Intelligent Investor (end of 3rd Chapter): “Robert Shiller, a finance professor at Yale University, says Graham inspired his valuation approach: Shiller compares the current price of the Standard & Poor’s 500-stock index against average corporate profits over the past 10 years (after inflation). By scanning the historical record, Shiller has shown that when his ratio goes well above 20, the market usually delivers poor returns afterward; when it drops well below 10, stocks typically produce handsome gains down the road.”

• MULTPL.COM’s PE-10 RESOURCES
Multpl.com has a plethora of accurate data sets extending back more than a century for dozens of theories – including each of the components that comprise the Graham/Schiller PE-10 back to 1871, including everything listed here.

• S&P 500 Annual Earnings to 1871: [color=royalblue]https://www.multpl.com/s-p-500-earnings/table/by-year[/color]

• S&P 500 Monthly Earnings to 1871: [color=royalblue]https://www.multpl.com/s-p-500-earnings/table/by-month[/color]

• S&P 500 Historical Prices Annual and by Month to 1871: [color=royalblue]https://www.multpl.com/s-p-500-historical-prices/table/by-year[/color]

• The Graham/Shiller PE-10 is presented (monthly or annual prices to 1871) here: [color=royalblue]https://www.multpl.com/shiller-pe[/color]


Chris

[size=3]With the Graham/Shiller PE-10 (or CAPE) Ratio at 30.09, Stocks Certainly Aren’t Cheap[/size]

This chart shows the Graham/Shiller 10-Year S&P 500 CAPE Ratio for 1871-to-June 22, 2019:

You can see that at a level of 30.09 (designated by the red dot on the far right), the S&P 500 remains at a valuation that is higher than at nearly any prior time in the last 148 years. That’s significant!

While prices shot up sharply higher, to a CAPE-10 of about 44 at the peak of the dot-com bubble in 2000, they reverted sharply back to their mean as stocks sold off -50% in 2001-2003 and then again by -56% from 2007-2009. Most recently, CAPE-10 series had returned to a high of 33.31 on January 1, 2018. Valuations dropped a bit as prices came down throughout the 2018 turbulence but have generally been flat for the last 18 months, in a narrow (and high) CAPE range of 28 to 33.

VALUATIONS CAN’T BE USED FOR TIMING…

High valuations do not mean that there is an immediate danger in the market of a downturn. To the contrary, valuations are a notoriously weak timing signal to identify when the next selloff will occur.

…BUT THE RELATIVE LEVEL OF VALUATIONS CAN BE A GUIDE FOR THE SEVERITY OF THE COMING SELLOFF

However, how far valuations are extended above or below the long-term, valuation average (at about 15) can give us an idea of how far stocks will have to move when the inevitable economic slowdown or rally takes place. Historically, the S&P 500 and other indices have always returned to their long-term PE mean at 15. But since 1990, prices and stock’s PEs have remained elevated without a trip into the undervalued territory below 15. Nevertheless, prices and PEs are still returning back to at least the PE Mean level (at 15), despite requiring two efforts over a decade to accomplish the feat.

Mild or moderately high valuations suggest that the end of the business cycle (they haven’t been repealed yet!) will not result in wholesale hysteria and stockbrokers jumping from the buildings in the vicinity of Broad and Wall Street. Mild or moderately extended valuation levels means that stocks don’t have so far to fall when the tide turns and an economic contraction begins.

On the other hand, extreme valuations – such as occurred in 1929, 2000, 2007, and today – means that the pain is going to be widespread and the resulting crash will have a devastating impact on the finances of many investors when the economic downturn occurs. Today’s S&P 500 valuation is actually higher than the level attained in 2007, just before the US Financial Crisis tore a hole in the world economy and we saw the S&P 500 lose -56% in 18 months – requiring 5-1/2 very long years to return back to breakeven!

The following chart shows both the overvalued conditions and the undervalued conditions relative to the long-term, Price/Earnings mean of 15 (dotted-blue centerline). When overvalued conditions became extreme, the dotted red downward arrows show the distance that stocks needed to fall to return to average. When prices became deeply undervalued, the dotted-green upward arrows showed how much was needed in the rally to return to the average. You can see that sometimes this was a two-step process to play out completely, such as the 2000-to-2003 dot-com crash, followed by a few-year break, then another selloff from 2007-to-2009 to complete the process and return (briefly) to the CAPE 15 level – i.e., ‘Ground Zero.’

Notice that since 1990, the CAPE or Shiller-PE-10 Ratio has been well above the long-term, historical average PE of 15. Since 1990, the average CAPE ratio has been closer to 25. Has there been a fundamental change that increased the valuation of corporate stocks in the last 29 years? …Or do you think that the law of averages means that stocks will enter into a new paradigm at some point where they will remain undervalued for an equivalent 29-year period?

Food for thought…

Chris

Shiller’s point is CAPE and 20-year market returns are correlated. I may be wrong, but I don’t think he claimed CAPE is mean-reverting to a constant, did he?

1 Like

Oh, I meant that in terms of making a DIY time series with P123 data.

P123 might populate SP500 time series data (e.g., SPEPSQ, SPEPSCNY) going back to 1989. This date is to sync up 10 years before P123’s first PIT fundamental backtesting data.

Fred,

I would have to re-read his book since it has been many moons since I did last. However, that is my claim (hypothesis, actually). I’ll examine the data and run a best-fit when I get a chance this weekend, but it’s pretty obvious from the chart that the data is mean-reverting. After all, nearly all financial data series are mean-reverting, which is a source of excellent excess returns for those who recognize and exploit it…

I pose again my last question:

Any ideas?

Yes, there has.

  • cash flow accounting makes it more difficult for companies inflate earnings:
    “In 1987, FASB Statement No. 95 (FAS 95) mandated that firms provide cash flow statements.[8] In 1992, the International Accounting Standards Board issued International Accounting Standard 7 (IAS 7), Cash Flow Statement, which became effective in 1994, mandating that firms provide cash flow statements.[9]”

  • mark to market accounting forces companies to write down assets losses
    “Statement of Financial Accounting Standards No. 157, Fair Value Measurements, commonly known as “FAS 157”, is an accounting standard issued during September 2006 by FASB, which became effective for entities with fiscal years beginning after November 15, 2007.”

  • earnings yields are related to interest rates:
    Invert the CAPE-10 and subtract out the 10 year Treasury or Corp Bond Yield, and you’ll find a relatively stationary time series. This is, in my opinion, a TRUE cyclically adjusted equity risk premium. Jim can run a Dickey-Fuller test to validate these tome series are cointegrated of order 0.

Higher CAPEs are here to stay awhile.

Potential catalyst for change continue to be changes to accounting rules (there may be others… who knows?). It is likely that regulations will continue to compel companies to report more conservatively, even though the prospects for investors are unchanged.

I don’t like the standard method of judging S&P500 valuation according to how much the the value of PE10 (CAPE-ratio) is above the long term average of PE10. I use a 35-year moving average instead of the long-term mean. That, in my opinion, should adjust for changes in accounting standards, etc. over time.

Then I calculate the ratio PE10/sma(35-yr PE10). This CAPE-MA35 ratio gives a much better picture of stock market valuation.

https://imarketsignals.com/2019/beyond-buy-hold-shiller-cape-ma35-ratio/

End of May 2019 the CAPE-MA35 ratio was 1.21, indicating that the stock market was reasonably priced, and the expected real 10-yr forward return is about 6%.

A CAPE-MA35 ratio less than 1.0 is a screaming buy signal. Check the 2009 level of this ratio and the 10 yr annualized return that followed.


CAPE-MA35 5-31-2019.png

Primus, you forgot to mention that the Securities and Exchange Commission was only established in 1934 to regulate the commerce in stocks, bonds, and other securities. … The Securities Act of 1933 required public corporations to register their stock sales and distribution and make regular financial disclosures.

So before 1934 it was the “Wild West” and any company data must be highly suspect. That’s why it is nonsense to calculate a long-term mean of PE10 with data from 1871 onward (as Shiller does) and to use this mean today to judge stock market valuation.

Wowza! What a great chart, Georg!

Excellent point, Georg.

That’s a good point, also. The theory I was proposing is that the extent that stocks are overvalued or undervalued is a significant factor affecting the scope of the subsequent selloff (reversal downward from extreme overvaluation) or rally (reversal upward from extremely oversold conditions) after the reversion-to-mean begins.

By that I mean, the selloff will be much worse after stocks have reached extreme overvaluation – either in vertical loss or time loss. Consider the -90% downturn after the 32.56 reading in September 1929 (which was, by far, the record-setting all-time-high for 71 years).

Moreover, after a 1,380% gain in the 18 years preceding the reading of 44 in December 1999 (dot-com bubble), stocks were in a sideways consolidation with two crashes of -50% for the subsequent 13.5 years, before they gained any ground again.

The level from which we measure to determine extreme over-valuation is open to debate, and I agree, a long-term moving average makes much more sense than the average from 1871. However, the 35-year average of the 10-year average may be too long to see shorter-term periods of extreme overvaluation – such as the 33.31 we saw in January 2018 – after a 321% gain in 9 years. That’s a slightly higher valuation than Black Tuesday, 1929.

Of course, there are many other factors that come into play that affect the extent of a selloff. For example, the 2009 crash was a credit-related crash, which historically is more severe than other types of downturns. Also, the Federal Reserve has been able to fight recessions in the modern era with lower interest rates, while that wasn’t done in 1929. On the other hand, at 2% on the 10-year today, that’s not much ammunition.

Other perspectives?

I used the 35-year moving average of the CAPE-ratio because it would contain at least 3 business cycles. A shorter MA would not do that.

The January 2018 level of PE10 when referenced to the 35-year MA was not such a big deal. The CAPE-35MA ratio was then 1.5, still signalling real 10-yr forward returns of about 4%. Not great, but no reason to panic.

No reason to panic, unless we are soon headed into a long-overdue recession, don’t you think? (That’s still no reason to panic, but you get the point, I hope.)

With a number of well-established recession indicators (two easy examples being unemployment and the yield curve) at levels where they have nowhere to go but in a direction that indicates the beginning of an economic contraction, that January 2018 CAPE high at 33 may have marked the top of the market for this cycle.

With Initial Unemployment Claims flat at 220k for a year, Continuing Claims flat for 6-7 months, and the Unemp Rate at 3.6%, the economy has been running at full capacity for some time now. Unemployment at a flat-line low always precedes the upturn, and that is one of the harbingers of economic contraction, declining sales and earnings, and lower stock prices – resulting in a bear market.

Sure, fractional new highs have been set in the S&P 500 by a few points in the last 17-18 months, but IMO it looks highly likely that we’ll see a -20% bear market before we see another 20% rally. Are 4% real returns still possible over 10 years? Of course, since the average recession only lasts 6-18 months and we’re talking about a timeframe of 10 years.

But that recession could cost investors -56% and require 5.5 years from which to recover before there is a 4% return 10 years from now – almost exactly the same parameters as the last 10 years. I know your indicators are not signaling the recession in the next 11 to 12 months, but I keep watching for a turn that could happen at any time. My models are ready to automatically switch to positions that will profit regardless of the direction, but it’s always fascinating to see it play out in real time.

Just my 2₵. What’s your take?

Not sure how to be subtle, but reading through this thread makes me more convinced than ever that those who say its useless to try to predict and move ahead of recessions/bear markets is a useless endeavor. Here are just some of the problems I see with long-term historical analysis:

  1. CAPE itself: There’s no way I’m going to give CAPE more predictive implications than does the guy who created it, and he’s never been more than iffy. And although it’s been a while since we introduced CAPE into p123, I do remember having had a hard time with the numbers because, as it turned out if I recall, Shiller was not removing unusuals from the EPS used to compute the ratio, meaning the sereis is much less stable than a serious indicator (which he never said it was) should be.

  2. The Fed: With every fiscal and monetary self-proclaimed genius building political brand and page clicks by talking about how nobody on the planet is dumber than the sitting Fed chair, the reality is that for quite a long time now the Fed has done what historians of the future will describe as an incredibly good job managing the economy and monetary system and accomplished, if not the death of the business cycle, then at least a huge stretching of expansions and a remarkable ability to contain and reverse conflagrations. We probably have to re-think the whole inflation-unemployment thing and during the course of my career, I’ve been through six market situations (1981-2, 1987, 1994, 1998, 2001-2, 2008) any or likely all of which, had they occurred before WWII, could have sparked a jump-out-a-window lose-your-savings type panic and in more than one case, a 1930s style depression.

  3. Globalization: Before the 1980s, we measured the US economy and things like rail or steel strikes had the potential to cripple everything. Now, we think in terms of global economy of which the US is just one participant (however much Trump longs for the old days, nothing he says or does can change the fact that they are gone), thus casting severe doubt on any model that does back more than a decade or so.

  4. Technology and productivity: This, in a sense, is part and parcel of the whole inflation/globalization phenomenon. Historical relationships between a unit of input and a unit of output need to be confined to museum archives. As to working servers, they should just be erased.

  5. Politics: Isn’t it obvious the broad political pendulum continues to swing and that after a generation of swinging rightward, its now turning to the left and will continue to do so regardless of the result of the next election. It’s also swinging away from the liberal democracy trend that had dominated much of the post WWII period. Its hard to say how this will impact markets’; a left shift might actually work better tha many expect if it doesn’t get out of control. At the end of the day, profitable business needs well-heeled customers and the right-dominated trends may have gone to far in anti-customer approaches (class war is stupidity - the worker from 9-5 is the customer from 5-9 — balance is best, anyone winning means everyone losing).

  6. Exogenous influences: Seriously, does or can anybody think that what happens to the US economy and markets within a plausible investment horizon will, for better or worse (and darned if I know which one) be influenced by what movers and shakers, none of who are likely to have the capacity to spell GDP, do and say.

So whenever I see a forecast and citations to data or charts, my reaction is WTF!

As to what I expect . . . See the slogan below my e-signature. I continue to stand by it.

I say: “The proof of the pudding is in the eating.”
You can follow our Business Cycle Index (BCI), which does not signal recession yet. When it does and no recession follows then Marc’s assertion that it is a useless endeavor will be proven correct. So let’s see what happens. We will dig up this post when we are closer to the next recession. Currently we are in the “boom phase” of this business cycle, after which inevitably comes a recession.

Check back to 1969. Unemployment at a record low 3.5% by the end of the year (lowest since 1948, and lower than the current rate), but that did not stop the 1970 recession beginning in January, and unemployment at 6% one year later.

The BCI is updated weekly on Seeking Alpha.


No good and I have no interest in looking at you charts. Past track records of prediction are NEVER proof of anything, especially if one says that a boom phase is followed by recession. That’s as exciting as saying a broken clock (non digital) is going to be right twice per day, or like predicting that stocks will change prices tomorrow (I predict they will). For a prediction to be worthwhile, we need to know when, how bad and in what form (since each its in a different way).

BTW, anyone want to subscribe to my NBA forecasting tool. I just created it this morning. It predicts the Toronto Raptors will upset the Golden State Warriors in the finals. :slight_smile: $$$$$$$$

Marc, I know you are not interested in my charts, and that’s o.k.

But it would be nice if you guys could keep the #SPPE10 current on P123 because Robert Shiller’s cyclically adjusted price–earnings ratio has served as one of the best forecasting models for long-term future stock returns.

The problem is that #SPPE10 is still a valid P123 function which can be used in simulations and the unsuspecting user (namely me) had no idea that this indicator in one of the buy rules had not been updated since 2014.