The U.S. equity market now appears "cheap" to many--the ones who have named this so called "V" shaped recovery in the U.S. equity markets, however it's important to keep context in mind when looking back at a decade of earnings growth compared to 1919.
Into December of 1919, the CAPE was at an all-time low. With so much focus on 1919 going into the COVID-19 pandemic among market commentary, the comparison that this chart allows to make is 1919 to 2019, with a suggestion of downtrend.
If the SPX indeed returns to multiples in 1919, that would put a market valuation of the SPX at around $500 according to the CAPE ratio.
Comment
⋅
In 1998, Robert Shiller--the Yale economist and Nobel Prize winner-- formalized that idea in a paper, "Valuation Ratios and the Long-Run Stock Market Outlook" and a book, "Irrational Exuberance." The latter made Shiller something of an economic prophet. In his book, which came out shortly before the dotcom crash, he warned that stocks were overvalued.
What is the CAPE ratio? It describes the price-earnings ratio over 10 years, rather than on a particular date. Called the Shiller P/E, it is calculated by dividing the price of a stock by its average earnings over the past 10 years, adjusted for inflation . It can also be used on an index such as the S&P 500 .
I am quite intrigued by this analysis. Would he be able to do the same on BTC?
Thanks
TayFx
⋅
@Skookky, No, this is taken from almost 100 years of economic data for the S&P500. I had to have the website and the admins help me formulate this specifically. I doubt it would even be possible to formulate, considering bitcoin is speculative in nature, not a tangible asset (more or less just a derivative, of a speculative asset). This ratio requires the 12-month P/E ratio to be taken into account, and (correct me if I'm wrong) but bitcoin doesn't have an earnings aspects, does it?
TayFx
⋅
@Skookky, I will see if I can help you later today!
Skookky
⋅
@TayFx, Indeed, if I understood your reasoning correctly, you are right. Thank you waiting for your return
I am quite intrigued by this analysis. Would he be able to do the same on BTC?
Thanks