Source: Société Générale



To answer that question, look at the chart above, courtesy of Société Générale’s Albert Edwards, who asks the question “Are equities really “unambiguously cheap”?“. (Cyclical Earnings charts after the jump).

Shiller’s CAPE chart shows that while US equities are fairly reasonably priced, they are not, to use Edwards term, ““unambiguously cheap”.” But for about a week in March of 2009, they were, but if you blinked you may have missed it.

Europe, on the other hand, appears to be appreciably cheaper than US equities. (Funny how recessions tend to do that). We have about a 16% European weighting, primarily through ETFs like GAL and DVYE.

Regardless, contrarians may wish to take note of this from a valuation perspective.



Are equities really “unambiguously cheap”?
Albert Edwards, Global Strategy Weekly
Société Générale, February 14, 2013



Source: Société Générale

Category: Contrary Indicators, Earnings, Investing, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

17 Responses to “How Cheap Are Equities ?”

  1. techy says:

    There is one huge problem with using PE comparison with past. These days public companies are not actually run for the benefit of shareholders, they are run by the management for their whims. Case in point MSFT, HPQ etc…
    A company can be making money hands over fist, but it can waste all that in no time and it may not be returned to shareholders, hence Earning does not matter. I am guessing that in the last 15 years ETF and Mutual funds have made real shareholders completely powerless. Investing these days is all about momemtum and speculation with the hope that maybe the company will not waste the earning and will return the cash to shareholders.

  2. bob2 says:

    Biggest problem I see looking at P/E’s right now for long term returns are corporate profit margins/ Earnings as a % of GDP relative to Labor costs as a % of GDP. Hard to say what drives it to rebalance, but one would think over the longer term it will.

  3. [...] Are equities here and in Europe ‘unambiguously cheap‘?  (Big Picture) [...]

  4. MidlifeNocrisis says:

    In December, I made a change to one of my “retirement” accounts to include a fund that tracks the EAFE index for somewhat similar reasons.

  5. Frilton Miedman says:

    Strikes me odd to observe P/E without factoring consumer buying power/wages, employment & consumer debt relative to inflation/cost of living.

    Granted, corporations are able to stabilize & grow earnings via increasing automation and outsourcing to parts of the world with labor at a fraction the cost, but in the end, margins are affected when buying power decreases.

  6. rd says:

    Starting the graph in 1980 makes US equities look “cheap.” However, this is only because of the massive bubble blown by Greenspan and Bernanke over the 15 years. Taking the chart back a century shows that it was unusual to have extended periods with CAPE values much greater than 20 until the late 90s. Have corporate managers and stock pickers gotten that much better over the past 15 years compared to the previous 100 years?

    BTW – the 2000 US peak of cycliccally adjusted price/cash flow was essentially the same as the Japanese peak 10 years earlier and much greater than the Europe peak in 2007. That doesn’t fill me with warm fuzzies for the US market over the next 10 years. I still think we have one more soul-crushing stock market crunch to come before this thing is done. I think the US can recover faster than Europe and Japan as we do not have as many structural social and cultural impediments to change although Congress appears to be working on that.

  7. Francisco Bandres de Abarca says:

    How cheap are equities?

    That depends upon which equity market is being addressed, and how contrived the underlying interest rate may be. That will impact your CAPE calculation a wee bit.

    Is it now a good time to buy equities? In that regard to the above observation, I suspect your DVYE will fare relatively well. However, when viewing how leveraged the U.S. equity market is right now (e.g., Bob Prince, co-CIO at Bridgewater Associates stating, “You want to be borrowing cash and hold almost anything against it”), and market margin debt levels indicate a historically high level, then combining that with how bullish sentiment is currently, it seems these are distribution days, rather than a time to buy-in.

    Speaking of Bridgewater Associates and their penchant for seeking historical context, one might wonder what the thinking on debt fatigue in combination with behavioral economics currently suggests.

  8. Concerned Neighbour says:

    If you agree with me that the only mover of any significance in these markets cares not whether they are cheap or dear (and in case has demonstrated time and again they can’t tell the difference and/or won’t do anything about it), this and all similar questions don’t matter.

    That said, if I thought an answer meant anything, I’d point to the following as warning signs:
    1. Historically high profit margins (those will come down)
    2. Unprecedented monetary and fiscal support that has shifted the debt burden from the private to the public sector; both policies are unsustainable (although with Bernanke, you never know)
    3. Historically high P/E’s (if you extend that chart back, you’ll see the mean is only 16.46, a level the S&P has only gone below once in the last 20 years. See here:
    4. Anemic economic growth as far as the eye can see (although in this market, that’s a positive as Bernanke can continue his printathon).

  9. bonzo says:

    On a long-term basis, the market is not cheap. The Q ratio, in particular, is way above historical averages. When Q ratio is high, it makes sense to build new companies from scratch (or expand existing companies using capital from primary stock and bond markets), because the price the market will pay for these new companies is greater than the cost to build. This process takes a while to work itself out, but the inevitable result of increasing supply while keeping demand constant is to drive down prices. And that is what is going to happen to the markets eventually.

    If you are confused by Q ratio, then apply the same analysis to real-estate (at least where land is essentially unlimited in supply, like in Texas). If you can build new houses for less than the market price of existing houses, then the prices of existing houses must fall, all other things being equal. The “land essentially unlimited” assumption applies to the stock market in most cases, other than where there are restrictions on expanding supply (such as limited telecom spectrum).

    Some say that low real interest rates justify high stock prices. But low real interest rates make it less expensive to build/expand companies, and also reduce demand and thus earnings, so they are a wash in the long run. This is why low real interest rates haven’t propped up the Japanese market (either in stocks or real-estate) for the past 20 years.

  10. TR says:

    Don’t forget to factor currency exchange rate. If you buy with a low dollar you’ll get waxed in the reversal.

    Thanks again for the graphs BR.

  11. constantnormal says:

    If cheap is all one is after, Japan looks like a winner … I’d really fell better putting my chips on a number that has solved some of their problems, which none of these three have done … But then I have keep reminding myself that a country’s economy, and its stock market are two COMPLETELY separate things …

  12. “…which none of these three have done…”

    good point..


    this Chart goes with EUR/JPN/USA..that’s nice, and all..

    though, as you know, there are Other Marts..

    do you/FusionIQ pay any mind to, as ex., “Frontier Markets”? or, even, some of the smaller ones/locales?

  13. Scott Frew says:

    Barry, you write as follows up above:

    Shiller’s CAPE chart shows that while US equities are fairly reasonably priced, they are not, to use Edwards term, ““unambiguously cheap”.”

    But that’s a complete misrepresentation of Albert’s views, if I’m reading what you say as suggesting he says US equities are not unhambiguously cheap. In fact, he believes that they’re extremely expensive. Page 3 of the note from which the charts are taken, Albert writes, of the reason behind his “rock bottom” 30% equity weighting, “That is because ours is a global index stance and that stance is dominated by what we believe is a continued extreme overvaluation in US equities.”

    So yes, it’s accurate to say he doesn’t think they’re unambiguously cheap; accurate, but completely misleading. Wouldn’t it be closer to the truth to say that he thinks US equities are unambiguously expensive?


  14. Syd says:

    Re: US Equities, they’re cheap if they’re going up to a CAPE of 40 or 50 again. Does the Fed have a target price for the S&P500, or is the goal just “higher”?

    As for the E, Earnings, how much of it depends on the growth of foreign markets? How much of recent years’ earnings growth has been from cost-cutting, and how much from sales growth?

  15. [...] use different measures to determine value, though price-earnings ratio often is the starting point. This blog post uses the Shiller/Hussman method (10 years cyclically adjusted earnings) to argue that stocks in the [...]

  16. beezle says:

    P/E is a meaningless ratio in this age of continuous write-offs and other finanical shenanigans. Analysts pick and chose what measure of earnings to base their p/e and price “targets” so as to be most convenient to their view. And then their are games played with the float. I would love to see a long term chart of the *total* (not per share) earnings of the S&P 500 – with all the crap *included*. No ‘oh thats discontinued!’ or other execuses. Then compare that to the market cap to see whether the market is over priced.