Bryan Taylor, Chief Economist, Global Financial Data
Global Financial Data has the most extensive collection of CAPE Ratios available anywhere. Our CAPE Ratios cover over 50 countries and the CAPE Ratio for the United States begins in 1841, 40 years before the CAPE Ratios that were calculated by Shiller using data from the Cowles Commission.
The Cyclically-Adjusted Price-Earnings (CAPE) Ratio is an inflation-adjusted average of earnings paid over the past 10 years relative to the current price of the market. A recession can have a dramatic impact on the CAPE Ratio, pushing it up as earnings decline, reducing the average amount of earnings paid over the past ten years. A recession can have a particularly large impact if net earnings turn into losses which are netted out against profits in the future. Although losses for the stock market as a whole are rare, they do occur.
The last time the S&P 500 reported a net loss was in the fourth quarter of 2008, which was the first quarterly loss the S&P 500 had registered since 1936! Since 1871, the S&P 500 has never registered net losses for a full year, only for quarters in 1936 and 2008.
We can see the impact of this loss on the CAPE Ratio by comparing the 7-year CAPE Ratio with the 10-year CAPE Ratio. The 7-year CAPE Ratio has already removed the 2008 losses from its calculations while the 10-year CAPE Ratio will begin excluding the losses in 2019. As the graph below illustrates, the 7-year CAPE Ratio dipped below the 10-year in 2016 just as the 2008 losses were removed from the calculations. Since then, the 7-year CAPE Ratio has remained below the 10-year CAPE Ratio and is currently about 4 points below.
We would anticipate that the 10-year CAPE Ratio will see a similar drop even if there were no change in the price of the S&P 500, and with the S&P 500 flirting with a bear market, this will drive the CAPE Ratio down even further.
It appears that the 10-year CAPE Ratio for the S&P 500 peaked in January 2018, ten years after the quarterly loss, and is now on a steady downward path for the next few years if only because the losses and low profits of 2008 will no longer be included in the calculation of the 10-year CAPE Ratio. How much the current bear market drives down the CAPE Ratio remains to be seen.
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