To the Editor:
I just now found your section on exchange-traded funds ETFs. The information that you have on ETFs is nothing short of spectacular! The PDF and accompanying spreadsheet alone are worth the subscription price to AAII. I cannot believe that I didn’t know this was here until now.
I haven’t found anywhere, either on the Internet or from major wire houses, that publishes such valuable information on ETFs in such a concise table format. Well done! I’m very pleased!
Comment posted to “A Cautionary Note About Robert Shiller’s CAPE,” by Stephen E. Wilcox, Ph.D., CFA, in the September 2011 AAII Journal:
The article was extremely well researched and written. I can’t quibble with anything that Professor Wilcox said.
I also read the posted comments. They are detailed and well thought out.
However, it all strikes me as “much ado about nothing.”
I downloaded the Shiller Excel file that has data back to 1871. I plotted the conventional price-earnings ratio and cyclically adjusted price-earnings ratio. For the 140 years, they almost always moved up and down together. As a matter of fact, their correlation is higher than 75%. They commonly peaked and bottomed at the same time. Sometimes the conventional price-earnings ratio was higher than the CAPE. Sometimes vice versa.
I feel that fundamental analysis and technical analysis techniques are only valuable to the extent that they help us improve our timing as to when to buy and sell in order to increase our investing profits.
With all due respect to Mr. Shiller and Professor Wilcox, I, for one, don’t see how the technical details of the differences between the conventional price-earnings ratio and the CAPE, or the weakness of either, can help us do that.
James from Ohio
Stephen Wilcox responds:
Thanks for your kind words about my article.
I’m quite sure you are correct in stating that changes in conventional price-earnings ratio and the CAPE are highly correlated. However, the point made in my article was that the popular analysis that compares the CAPE to its long-term average is currently (as of July 2011) providing an overly bearish assessment of the worth of U.S. equities.
Here is a link to an article that briefly mentions my paper: http://www.aaii.com/090811.html
As you can see, there is a graph of the traditional price-earnings ratio back to 1960. Note that it currently is significantly under its average since 1960 while (see my paper) the CAPE is currently significantly over its long-term average. Thus, the two measures are giving conflicting views of the worth of U.S. equities. Something is screwed up, and I think it is the CAPE analysis.
Comment posted to “Historical Performance and Future Stock Market Return Uncertainties,” by Ed Easterling, in the September 2011 AAII Journal:
I agree with Mr. Easterling’s analysis. Averages can be misleading. For example, let’s say yesterday the temperature was 80°. I was too hot. Today, the temperature is 60°. Now, I’m too cold. However, the average of 70° is just right.
In order to portray the variation in the average annual returns that an investor would have obtained, Mr. Easterling categorized all 10-year returns since 1900 as either less than 8%, 8%–12%, or more than 12%. While this is effective, I feel that it understates the magnitude of the variation in the reader’s mind. I came to this conclusion by looking at the “moving” average annual return for each of the 10-year, 20-year, 30-year and 40-year time periods. I did so using Robert Shiller’s data, which can be obtained at www.econ.yale.edu/~shiller/data.htm. This is monthly data for the S&P 500 going back to 1871. It includes dividends.
The average annual returns are “moving” in that, for each month in the 140-year period, I calculated the average annual return over each of the next 10, 20, 30 and 40 years. The average annual returns for each of the four time periods starting in 1926 are fairly similar. They are 10.5%, 11.2%, 11.2% and 10.8%, respectively, for the 10-, 20-, 30- and 40-year periods. This is consistent with the roughly 10% average annual return that Mr. Easterling quoted and other studies have found for the stock market over the long term. However, the minimum and maximum average annual returns vary quite a bit from the 10% average. The minimum averages were –4.0%, 2.0%, 7.6% and 7.9%. The maximum averages were 21.2%, 17.9%, 14.3% and 13.2%.
Jim Grant from Solon, Ohio