Arguably the most popular and reliable measure of stock market value is the cyclically-adjusted price-earnings ratios (CAPE). The CAPE ratio, which was introduced by Graham and Dodd and popularised by Robert Shiller, measures the stock market’s capitalisation against the average of 10 years’ worth of earnings.
In a recent white paper, Cambria Quantitative Research’s Mebane Faber examined the CAPE ratios of the stock markets around the world.
“We found most CAPEs averaged around 15‐20, bottomed out around 7, and maxed out around 45 (and a few made the United States bubble in the late 1990’s look pathetic in comparison, like Japan reaching a value of nearly 100 in 1989).
Here’s a table from Faber’s report ranking CAPE’s from cheapest to most expensive:
From Faber’s white paper:
We examined 32 countries with data from Global Financial Data and Morningstar, including as much data as we could find. We realise there is some bias in this study (if you have German PE data to 1685 or French to 1724 please contact us), but we did the best with what we have. We utilized local real returns (and found dollar based real returns to be nearly identical) to net out the effects of inflation.
We examined all the countries on a yearly basis since 1980, CAPE levels, and future returns. The sample includes approximately 10 counties in 1980, 20 in 1990, and 30 by 2000. The results are in the table below and largely confirm the US data. Buy low, sell high.
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