US CAPE and q chart
US CAPE and q chart. |
With the publication of the Flow of Funds data up to 30th June, 2013 (on 25th September, 2013) we have updated our calculations for q and CAPE.
The latest edition involves a major change in the compilation of the data on non-financial corporate balance sheets in response to the change in the national accounts (“NIPA”) published by the BEA. The most significant change is the redefinition of R&D expenditure as a final rather than, as before, an intermediate output. This has resulted in the inclusion of a new entry under assets, “Intellectual property products”. These amounted to $1,857.4 bn. at the end of June 2013.
Both q and CAPE include data for the year ending 30th June, 2013. At that date the S&P 500 was at 1606 and US non-financials were overvalued by 52% according to q and quoted shares, including financials, were overvalued by 63% according to CAPE. (It should be noted that we use geometric rather than arithmetic means in our calculations.)
As at 26th September, 2013 with the S&P 500 at 1699, the overvaluation by the relevant measures was 60% for non-financials and 72% for quoted shares.
Although the overvaluation of the stock market is well short of the extremes reached at the year ends of 1929 and 1999, the chart shows that it has reached the other previous peaks of 1906, 1936 and 1968.
Data for our calculations of q are taken for 1900 to 1952 from Measures of Stock Market Value and Returns for the Non-financial Corporate Sector 1900 – 2002 by Stephen Wright, published in the Review of Income and Wealth (2004) and for 1952 to 2010 from the Flow of Funds Accounts of the United States (“Z1”) published by the Federal Reserve. Data for our calculations of CAPE are taken from the data published on Robert Shiller’s website, updated from data published by Standard & Poor’s and the BLS.
N.B. The geometric mean of the cyclically adjusted PE, using 10 year data adjusted for changes in the CPI, was 15.7. The cyclically adjusted PE for the 10 years to June 2013 was 25.2 and the market was thus 61% overvalued (25.2 ÷ 15.7).
Those who wish to claim that the market is cheaper than this can do so by a combination of data mining (selecting data periods which are shorter than the time over which data are available) and by using arithmetic averages.
Please use the contact form on this site if you require additional information or the backing data for the chart.