In case you missed it – Jeremy Siegel of “Stocks for the Long Run” fame wrote a piece in the FT on Monday blasting Robert Shiller’s famous CAPE valuation metric. This isn’t the first time someone has torn into the metric. For a more thorough view I would highly recommend seeing this post in which Merrill Lynch said the metric was flawed and then this follow-up by JJ Abodeely.
Anyhow, I won’t go into the CAPE and my personal views too much since I don’t really use any valuation metrics in my macro analysis (I find them largely unreliable for practical strategy application), but I did want to point out something that John Hussman highlights – if the Shiller CAPE is wrong then several other metrics are probably also wrong…because they’re telling the exact same story!
First off, here’s the Q Ratio which measures the market value of a company divided by the replacement value of firm assets (via Smithers):
Warren Buffett’s favorite valuation metric, GNP to total market cap is telling a similar story:
And revenues relative to U.S. equity prices tells a similar story:
Of course, these metrics aren’t all calculated the same way, but they tend to correlate very closely over time. When one is overvalued they all tend to be overvalued. The CAPE Shiller ratio might be misleading, but one thing that’s certain is that the high market values it currently shows are confirmed by several other indicators. The bigger question is whether any of these metrics are actually all that useful for practical purpose. I have my doubts. As for “stocks for the long-run”, well, let’s just say I don’t have time to debunk that one here.
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