Tag: Stock Market

Shiller CAPE Is Currently Pricing in One Great Recession Every Decade

Posted on by Brad DeLong

Note to Self: Spent the Berkeley Econ faculty lunch talking to Yuriy Gorodnichenko, Pierre-Olivier Gourinchas, St. Matthew the Greater, Dmitriy Sergeyev, and a couple of others about a very wide range of topics, ending with r-star (which Yuriy has to discuss Saturday at the Clausen Center Conference). I left the conversation desperate to figure out how Shiller’s stock-market CAPE index which currently suggests substantial stock market valuation even with a low fundamental safe real interest rate r-star is affected by the low earnings of the crisis years 2008-2011…

Yes, it makes a significant difference:

2017 11 15 Shiller Alternative CAPE

Replacing actual earnings from 2007 on with just flat real earnings until actual earnings catch up knocks the Alternative CAPE index down by 5, from higher than any time save during the High Dot-Com Bubble to lower than during the 1995-2007 part of the Great Moderation era. Taking Shiller CAPE at face value means that your idea of stock market fundamentals is currently pricing in one Great Recession every decade. If you do not believe that, you should not take Shiller CAPE at face value…

2017 11 15 Long Run Shiller Alternative CAPE

Data: http://delong.typepad.com/2017-11-15_shiller_cape_alternative.csv
Notebook: https://www.dropbox.com/s/9vhwu0d26wobpg8/2017-11-15%20Shiller%20Alternative%20CAPE.ipynb

# set up function to import data as a pandas time series dataframe object 

import pandas as pd
import os
from urllib.request import urlretrieve

URL = "http://delong.typepad.com/2017-11-15_shiller_cape_alternative.csv"
FILENAME = "2017-11-15_shiller_cape_alternative.csv"

def get_stocks_data(filename, url, force_download = False):
    if force_download or not os.path.exists(filename):
        urlretrieve(url, filename)
    data = pd.read_csv(filename, index_col = 0)
    return data

# import shiller data as a pandas time series dataframe object
# read it in from web if necessary

stocks_data = get_stocks_data(URL, FILENAME)
stocks_data.rename(columns = {'CAPE’':'Alternative CAPE'}, inplace = True)

stocks_data['Alternative CAPE'].plot()
stocks_data['CAPE'].plot()

plt.title("Stock Market Value as a Multiple of a 10-Year

Lagged Moving Average of Earnings”,
size=20)
plt.ylabel(“Multiple of 10-Yr Average of Lagged Earnings”)
plt.xlabel(“Year”)
plt.xlim(1970, )
plt.legend()

stocks_data['Alternative CAPE'].plot()
stocks_data['CAPE'].plot()
plt.title("Stock Market Value as a Multiple of a 10-Year

Lagged Moving Average of Earnings”,
size=20)
plt.ylabel(“Multiple of 10-Yr Average of Lagged Earnings”)
plt.xlabel(“Year”)
plt.legend()

Must-Read: Gavyn Davies: Why Hasn’t the Productivity Crisis Caused a Bear Market (Yet)?

Posted on by Brad DeLong

Must-Read: This by the very sharp Gavyn Davies seems to me to be wrong. An ebbing of the current shortage of risk-bearing capacity would produce a further boom in equities. Central banks’ focus on a 2%/year inflation target makes it very difficult to envision any improvement in the economy leading to be a rapid increase in the wage share. Some unknown future negative shock to the economy could certainly produce a large bear market in equities. But a return to more normal risk attitudes in markets and a continuation of business-as-usual are very unlikely to do so:

Gavyn Davies: Why Hasn’t the Productivity Crisis Caused a Bear Market (Yet)?: “The 2016 calendar year may well see productivity growth in the US economy slumping to around 0.5 per cent, a catastrophic outcome…

…The productivity slowdown has often been called a ‘puzzle’, because it has coincided with a period of rapid technological change in the internet sector…. [But] many of the obvious benefits of the internet revolution appear to increase human welfare without leading to increases in market transactions and nominal GDP. Furthermore, there are several other plausible reasons for the productivity slowdown, including low business investment and a loss of economic dynamism since the financial crash. There is however a different puzzle connected to the productivity slowdown. Given that it has greatly reduced the level and expected growth rate in nominal GDP, why has it had so little apparent impact on equities, an asset class that depends on the level and expected future growth of corporate earnings?…

The conclusion is that the damaging impact of the productivity slump on the S&P 500 has so far been masked by other factors, but there are signs that this might be changing…. The drop in productivity growth has been accompanied by a decline in the yield on safe assets (government bonds), so the discount rate to be applied to future corporate earnings and dividends has declined…. There are however some other reasons…. The share of profits in the economy has risen to historic peak levels, and the dividend payout ratio has also increased…. So does this mean that investors can sit back and relax in the face of a productivity crisis that will clearly damage the outlook for the global economy very seriously? I doubt whether this aberration can last forever. The decline in the real bond yield may be reaching its limits…. And the sharp falls in the unemployment rate, especially in the US, could cause greater wage pressure and a decline in the profit share in GDP…