The CAPE Ratio Is High but not Pricey

• Robert Shiller explained why he looks at 10 years of earnings and the importance of factoring in inflation when valuing assets in this 2013 AAII Journal article.


• For those wanting to consider other market valuation measures, take a look at “Three Value-Investing Benchmarks.” The data is from the 2017 publication date, but you can use the formulas to calculate updated valuations.


• December brings our annual tax guide; the updated 2020 edition is now online.


• I’ll discuss what the changes to the tax code mean for individual investors on Wednesday at 7:30 p.m. CST. Click on the link to register for the webinar.


• The December AAII Journal also lists 17 financial and investing moves you can take before the year’s end.

The percentage of individual investors describing their short-term outlook as “bearish” is at an 11-month low in the latest AAII Sentiment Survey. The latest AAII Sentiment Survey also shows optimism rebounding back to an unusually high level.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 1.8 percentage points to 49.1%. Optimism is above its historical average of 38.0% for the fourth consecutive week.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rose 3.0 percentage points to 28.3%. Even with the increase, neutral sentiment remains below its historical average of 31.5% for the 45th time out of the past 47 weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, declined 4.8 percentage points to 22.7%. Pessimism was last lower on January 1, 2020 (21.9%). Pessimism is below its historical average of 30.5% for the fourth consecutive week.

As noted above, bullish sentiment is back at an unusually high level (more than one standard deviation above its historical average). Historically, such readings have been followed by lower-than-average six- and 12-month returns by the S&P 500 index. Given the possibility of coronavirus vaccines soon being available, the historical trends may not be repeated.

Pessimism is near the bottom of its typical range. The breakpoint between typical and unusually low readings is 21%.

The positive results from Pfizer’s and Moderna’s late-stage trials for the coronavirus vaccine have made many individual investors either more optimistic or, at least, less pessimistic. Concern about the shorter-term trends in coronavirus cases and the resulting economic impact remain, however. Also influencing individual investors’ sentiment are the results of the recent election, valuations and interest rates.

Over the holiday week, we asked AAII members what their favorite thing to eat on Thanksgiving was. Turkey was the most popular, followed by stuffing and gravy.

For this week’s special question, we asked AAII members how they think the average consumer is faring relative to a year ago. More than half of respondents (56%) say that the average consumer is faring worse relative to a year ago due to coronavirus-related economic slowdown, unemployment and declines in spending. This compares to about 30% of respondents who say that while the average consumer is doing fairly well if they are employed, others who have lost their job are doing substantially worse. In addition, about 14% of respondents say that the average consumer is faring about the same compared to last year.

Here is a sampling of the responses:

• “There are extremes: If you are still working, everything is fine—financially speaking. If you are unemployed, you are facing financial destruction on January 1. All of the government support programs expire, and it doesn’t look likely that the lame duck Congress will do anything before the inauguration.”
• “Very well if you’re working; however, a lot of people are still out of work or not working full time. The big hurdle is to get travel, leisure and restaurants back into production. A lot of people have been left out of recovery.”
• “On average, things are worse now than a year ago. With some people unemployed and others on reduced work hours, they are a drag on the economy, in spite of the record stock market. Wealthy and retired people are better off now, but the average consumer is worse.”
• “There is no such thing as ‘the average consumer.’ It all depends on your job and income status. Those who have been laid off due to the coronavirus will probably cut spending as much as possible until they see the recovery due to vaccinations being given. I think that when vaccinations are widely available, there will be a surge in pent-up spending not only for consumer goods but all services and travel.”
• “Likely the average consumer suffered job/income issues and is worse off today than a year ago. For retirees (like me), the impact of the coronavirus has been minimal, and the stock market rise has been very favorable.”