CAPE post-discovery results

Investing Strategies Mechanical Investing
1

Shiller’s CAPE, first published in 2000, is sometimes used to try to predict long-term stock returns. How has CAPE done post-discovery? (CAPE is not a timing signal, and so is not actionable for most people.) For this post I will use perhaps the simplest prediction:

Subsequent 10-Year Annualized Real Return = 1 / CAPE

There are more complicated formulas used, but I will stay with this simple formula for this post. The Shiller data is monthly, but there are only 14 independent 10-year periods. Picking one at random for discussion (sorted by Error):

  Date   CAPE  CAEY   10ySR  Error  Inflation_10yS
**2011.06  22.1  4.5%   12.8%   -8%         2%**
1951.06  11.6  8.6%   15.1%   -7%         1%
1991.06  18.0  5.6%   11.9%   -6%         3%
 
1891.06  15.7  6.4%   10.8%   -4%         0%
1901.06  25.2  4.0%   4.4%     0%         2%
1941.06  12.2  8.2%   8.3%     0%         6%
1981.06  8.8   11.4%  11.0%    0%         4%
1961.06  20.3  4.9%   4.4%     1%         3%
1881.06  19.0  5.3%   4.0%     1%         -2%
**2001.06  33.1  3.0%   -0.1%    3%         2%**
1921.06  5.2   19.2%  15.3%    4%         -2%
1931.06  15.1  6.6%   2.5%     4%         0%
 
1971.06  17.1  5.9%   -1.0%    7%         8%
1911.06  15.3  6.5%   -4.6%   11%         7%

Where Error = CAEY - 10ySR, and Inflation_10yS is Subsequent 10-Year Annualized Inflation.
CAEY = 1/CAPE

The 2 post-discovery decades had Errors of 3% and -8%. One accurate prediction (2001) and one prediction that was too pessimistic (2011). These Errors are similar to those seen in 1940s and 1950s (0% and -7% Errors) and 1980s and 1990s (0% and -6% Errors).

There were 2 decades when CAPE was too optimistic, maybe because investors got more bad news than normal: the 1910s and 1970s. Stagflation, oil price shocks, World War I, and the Spanish flu pandemic made business difficult. Inflation was above 7% in these 2 decades, and that reduced real returns. Investors’ sinking optimism was reflected in sinking CAPE values (from 15 to 5, and 17 to 9 over these decades). Stock returns were low (-5% and -1% real 10-year annualized).

There were 3 decades when CAPE was too pessimistic: the 1950s, 1990s, and 2010s. Inflation was low, and there were some surprises (dot-com bubble, COVID-19 pandemic), but investors’ rising optimism was reflected in rising CAPE values (from 12 to 20, 18 to 33, and 22 to 37 over these decades). Stock returns were high (15%, 12%, and 13% real 10-year annualized).

Using BCC=0 timing improves results mostly in the decades when CAPE was too optimistic: 1930s, 1970s, and 2000s.

                       10ySR         Error  improvement
  Date   CAEY   10ySR  wBCC0  Error  wBCC0     wBCC0
2011.06  4.5%   12.8%  10.3%   -8%    -6%       -2%
1951.06  8.6%   15.1%  14.4%   -7%    -6%       0%
1991.06  5.6%   11.9%  12.1%   -6%    -7%       0%
 
1941.06  8.2%   8.3%   7.3%     0%     1%       -1%
1981.06  11.4%  11.0%  12.4%    0%    -1%       1%
1961.06  4.9%   4.4%   5.3%     1%     0%       1%
2001.06  3.0%   -0.1%  5.8%     3%    -3%       6%
1931.06  6.6%   2.5%   10.2%    4%    -4%       7%
 
1971.06  5.9%   -1.0%  1.3%     7%     5%       3%

---- links ----
“The current S&P500 10-year P/E Ratio is 29.9. This is 49% above the modern-era market average of 19.6, putting the current P/E 1.2 standard deviations above the modern-era average. This suggests that the market is Overvalued.”
https://www.currentmarketvaluation.com/models/price-earnings…

“According to data first presented in “Irrational Exuberance” (which was released in March 2000, coinciding with the peak of the dotcom boom), and updated to cover the period 1881 to August 2020, the ratio has varied from a low of 4.78 in December 1920 to a high of 44.20 in December 1999.”
https://www.investopedia.com/terms/p/pe10ratio.asp
https://en.wikipedia.org/wiki/Cyclically_adjusted_price-to-e…

“Expected returns (nominal, annualized over the next 10 years) = Starting Dividend Yield + Earnings Growth rate + Percentage change (annualized) in the P/E multiple.”
https://alphaarchitect.com/2021/03/predicting-stock-returns-…

Markets: Exuberance is not always ‘irrational’, July 25, 2014
“Any comparison of valuations covering long periods is meaningless if it fails to take into account vast changes in technology, economic policies, interest rates, social and political structures, and taxes… Recent evidence is conclusive: For the past 25 years, the Shiller ratio’s signals have been almost uniformly wrong.”
http://web.archive.org/web/20150507071031/http://blogs.reute…

“for me the anomaly does not seem to be a CAPE of 25 (or, given historical real returns on other asset classes and very low current yields on investments naked to inflation risk, 33) but rather the CAPEs of 14-20 that we saw in the 1980s, 1960s, 1950s, 1900s, 1890s, and 1880s that Robert Shiller appears to think of as “normal” and to which today’s CAPE should someday return.”
https://delong.typepad.com/sdj/2014/08/under-what-circumstan…

9 Likes
2

Shiller’s CAPE, first published in 2000, is sometimes used to try to predict long-term stock returns… How has CAPE done post-discovery?

It’s a fair bit older than that.
Professor Shiller’s first article was I believe in July 1996.
http://www.econ.yale.edu/~shiller/data/peratio.html
And the general notion of averaging the earnings goes back quite a bit further.

Here is another way to look at the post discovery correlation between CAPE on purchase date and the returns in the next several years.
https://discussion.fool.com/cape-makes-perfect-sense-and-has-imm…


                                     Lowest  Pctl 10  Average  Pctl 90  Highest
Most expensive   5%  of start dates   -4.1%    -3.8%   **-3.3%**    -2.8%    -2.4%
Next            10%  of start dates   -3.4%    -3.2%   **-2.4%**    -1.4%    -0.8%
Next            10%  of start dates   -2.7%    -2.3%   **-0.7%**     0.6%     1.2%
Next            10%  of start dates   -1.3%    -0.9%   **1.3%**     2.5%     2.8%
Next            10%  of start dates   -0.2%     0.0%   **1.7%**     4.6%     5.1%
Next            10%  of start dates    0.9%     1.0%   **2.6%**     5.3%     6.1%
Next            10%  of start dates    1.4%     1.6%   **3.0%**     6.2%     7.0%
Next            10%  of start dates    1.6%     2.0%   **4.2%**     7.5%     7.8%
Next            10%  of start dates    2.1%     2.3%   **5.0%**     8.7%     9.3%
Next            10%  of start dates    3.2%     3.7%   **6.7%**    10.7%    11.5%
Cheapest         5%  of start dates    4.8%     5.2%   **10.0%**    13.3%    13.6%

This particular study covers was done a few years ago and covers results for purchase dates from 1995 to 2006, looking forward 7 years.
So it aligns pretty well with the “post discovery” era of Shiller CAPE, just not quite up to date.
The figure for each purchase is taken as the CAGR averaged across all end dates 4-10 years later to smooth out the randomness of the market level at the end date.

It’s an interesting data series.
Immensely strong predictor even out of sample, yet famously useless for market timing.
Great for retirement planning, though.

Jim

16 Likes
3

Ever compared a chart of CAPE
https://www.multpl.com/shiller-pe

and the Buffett indicator?
https://www.longtermtrends.net/market-cap-to-gdp-the-buffett…

Not identical but nevertheless interesting to have a look at both.

3 Likes
4

Ever compared a chart of CAPE and the Buffett indicator?..

Another one is the Value Line Median Appreciation Potential. (3-5 year)
Reading at May 27: 70%
At recent market low March 2020: 145%
At recent market high Jan 2022: 35%

This isn’t as theoretically reliable, as at its core it is based mostly on extrapolation of recent results and some analyst eyeballing.
Yet it frequently gives relatively similar results near extremes.
The figure was four times higher in March 2009 than it was in Feb 2007.

At the moment, it seems a fair bit more optimistic than I would be, even compared to its own history.
It’s near its long run median number, I believe.

Here’s a research paper on it.
https://www.researchgate.net/publication/285027746_Using_Val…
They divide time into three sections of bad, medium, and good forward returns:
Forecasts <55%, 55-85%, and forecasts>85%.
They suggest modifying one’s portfolio to have low, medium, or high beta exposure at those times, respectively.

Jim

8 Likes
5

Price–Earnings Ratios as Forecasters of Returns: The Stock Market Outlook in 1996
“Looking at the diagram, it is hard to come away without a feeling that the market is quite likely to decline substantially in value over the succeeding ten years; it appears that long run investors should stay out of the market for the next decade. Is this conclusion right?”
http://www.econ.yale.edu/~shiller/data/peratio.html

“Looking at the diagram” led to a wrong conclusion. The market did not “decline substantially”. August 1996 values: 25 CAPE, 4% CAEY, 6% 10ySR, 3% inflation_10yS.

returns from August 1996 to August 2006 for VFINX (US stocks) and VBMFX (US bonds):

  stock                  Initial   Final                                         Max.    Sharpe  Sortino     Market
allocation   Portfolio   Balance  Balance  CAGR  Stdev  Best Year  Worst Year  Drawdown  Ratio    Ratio    Correlation
    60%     Portfolio 3  10,000   22,366   8.3%    9%      24%        -10%       -22%     0.52     0.79       0.96
   100%     Portfolio 1  10,000   23,789   9.0%   16%      33%        -22%       -45%     0.40     0.58       0.98
    0%      Portfolio 2  10,000   18,285   6.2%    4%      11%         -1%       -3%      0.69     1.06       -0.07

https://www.portfoliovisualizer.com/backtest-portfolio?s=y&a…

2 Likes
6

What will the market real return be from 2021 to 2031?

  Date   CAPE  CAEY   10ySR  Error  Inflation_10yS  GS10
1881.06  19.0  5.3%   4.0%     1%         -2%       3.7
1891.06  15.7  6.4%   10.8%   -4%         0%        3.6
1901.06  25.2  4.0%   4.4%     0%         2%        3.1
1911.06  15.3  6.5%   -4.6%   11%         7%        4.0
1921.06  5.2   19.2%  15.3%    4%         -2%       4.8
1931.06  15.1  6.6%   2.5%     4%         0%        3.5
1941.06  12.2  8.2%   8.3%     0%         6%        2.2
1951.06  11.6  8.6%   15.1%   -7%         1%        2.6
1961.06  20.3  4.9%   4.4%     1%         3%        3.9
1971.06  17.1  5.9%   -1.0%    7%         8%        6.5
1981.06  8.8   11.4%  11.0%    0%         4%        13.5
1991.06  18.0  5.6%   11.9%   -6%         3%        8.3
2001.06  33.1  3.0%   -0.1%    3%         2%        5.3
2011.06  22.1  4.5%   12.8%   -8%         2%        3.0
2021.06  36.7  2.7%    **?      ?          ?** 1.5

Some possible scenarios:

A. market crash, no real earnings growth
  Date   CAPE  CAEY  10ySR  Error
2021.06   37    3%    **-4%**   7%
2031.06   **24** 
 
B. market flat, no real earnings growth
  Date   CAPE  CAEY  10ySR  Error
2021.06   37    3%    **0%**   3%
2031.06   **37** 
 
C. market flat, 2% real earnings CAGR
  Date   CAPE  CAEY  10ySR  Error
2021.06   37    3%    **0%**   3%
2031.06   **30** 
 
D. market 2% real CAGR, 2% real earnings CAGR
  Date   CAPE  CAEY  10ySR  Error
2021.06   37    3%    **2%**   1%
2031.06   **37** 
 
E. market 4% real CAGR, 4% real earnings CAGR
  Date   CAPE  CAEY  10ySR  Error
2021.06   37    3%    **4%**  -1%
2031.06   **37** 
 
F. repeat 2011-2021: market 12% real CAGR, 5% real earnings CAGR
  Date   CAPE  CAEY  10ySR  Error
2021.06   37    3%    **13%** -10%
2031.06   **70**

10-year earnings (as used in CAPE) growth rate has a bimodal distribution, with peaks around 0% and 2.5% CAGR.

E10 CAGR
  from      to   count
  -4.0%   -3.5%    17
  -3.5%   -3.0%    13
  -3.0%   -2.5%    10
  -2.5%   -2.0%    10
  -2.0%   -1.5%    13
  -1.5%   -1.0%    82
  -1.0%   -0.5%   124
 **-0.5%   0.0%    127**
  0.0%    0.5%    124
  0.5%    1.0%    112
  1.0%    1.5%     99
  1.5%    2.0%     90
  2.0%    2.5%    124
 **2.5%    3.0%    195**
  3.0%    3.5%     88
  3.5%    4.0%    102
  4.0%    4.5%     95
  4.5%    5.0%     47
  5.0%    5.5%     64
  5.5%    6.0%     40
  6.0%

In the past 140 years (1881 to 2022):
E10 was flat (about 45) from 1974.04 to 1995.07. (20 years)
E10 was flat (about 20) from 1908.04 to 1951.02. (43 years)

4 Likes
7

“Looking at the diagram” led to a wrong conclusion. The market did not “decline substantially”. August 1996 values: 25 CAPE, 4% CAEY, 6% 10ySR, 3% inflation_10yS.

What point were they trying to make? From 1996 to 2006 you about doubled your money. I guess CAPE is a poor indicator? Like Body-Mass-Index for ideal weight. But by March 2009 you were back to 1996 levels again. Maybe it’s like Elliot Wave Theory. It’ll tell you what’s going to happen but not when, or how much, or how long. Which is leaving out very pertinent pieces of information.

I like the concept behind CAPE and I want to believe in it, it sounds so logical, but all of these El Grando, “Big Eye” indicators all seem to be more hat than cattle. Also, and this is what they never say when giving these long-look prognostications, when they say “going forward” (like Bogel used to say) or “in the coming decade”… “returns will be less, hard to come by, disappoint investors” whatever, they mean on a buy-and-hold basis. Whether they’re right or wrong, they mean throw money in the fountain and forget it. Doesn’t mean you can’t make any money. Just not on buy-and-hold

1 Like
8

What point were they trying to make? From 1996 to 2006 you about doubled your money. I guess CAPE is a poor indicator? Like Body-Mass-Index for ideal weight. But by March 2009 you were back to 1996 levels again.

Whatchutalkinabout? Those were the good old days of MI. From 1996 to 2006 my portfolio grew x6, and at the 2009 bottom it was equal to 2006.

Elan

2 Likes
9

What point were they trying to make? From 1996 to 2006 you about doubled your money. I guess CAPE
is a poor indicator? Like Body-Mass-Index for ideal weight. But by March 2009 you were back to 1996
levels again. Maybe it’s like Elliot Wave Theory. It’ll tell you what’s going to happen but not
when, or how much, or how long. Which is leaving out very pertinent pieces of information.

I don’t think we should have the right to cherry pick endpoints.
You can prove, or disprove, anything that way.
If you want a reasonable result, smooth them out.
If you do, you find that CAPE is not a poor predictor at all.

Take the CAEY on any given day. (I use something very much like the E10 in CAPE, just smoothed a bit more)
Look at the returns 4,5,6,7,8,9,10 years forward, annualized those figures, and average them.
That gives you an idea of the “average” rate of return for a hold of “about seven years”.
This means the number you get is capturing the effect of the start point, not a random specific end point.

Taking the average CAEY in a calendar year, and the average forward return calculated that way, you get this table:


Purchase    Avg CAEY    Avg 7yr forward
  Year      at start   Real total return
  1989        6.5%          12.4%
  1990        6.7%          15.2%
  1991        6.1%          15.6%
  1992        5.6%          15.0%
  1993        5.3%          14.0%
  1994        5.3%          13.7%
  1995        4.7%          10.9%
  1996        3.9%           7.1%
  1997        3.2%           3.3%
  1998        2.8%           0.5%
  1999        2.4%          -2.3%
  2000        2.5%          -3.0%
  2001        3.2%          -0.2%
  2002        4.1%           2.6%
  2003        4.4%           3.3%
  2004        3.9%           1.8%
  2005        3.9%           2.9%
  2006        3.9%           3.5%
  2007        3.7%           3.4%
  2008        5.1%           8.6%
  2009        6.6%          13.5%
  2010        5.5%          12.0%
  2011        5.1%          12.2%
  2012        4.9%          12.6%
  2013        4.5%          12.0%

There’s a pretty strong correlation here. Do a scatter plot.
All the return results are probably exaggerations, as this whole stretch has been a period of gradually rising valuation multiples.
But, FWIW, a linear fit through that table gives t his formula:
Expected ~7 year real total return = 4.47 times initial trend earnings yield - 12.74%
Today’s trend earnings yield measured the same way is 3.34%
So, if valuations continue be similar to and rising at the same gradual rate as they have since 1989,
one might expect an S&P 500 total return of inflation + 2.34%/year in the next ~7 years.
Since the dividend yield is around 1.33% at the moment, that means the index would rise about inflation + 2%/year.
Absent better information, that’s what one should expect.

A much better table strips out the change in valuation multiple between purchase date and sale date.
That would give better information.
But I’m lazy today.

The general conclusion is that we have a pretty good idea that current high valuation will lead to
lower returns over time frames longer than the current bull or bear market.
True for any end date that is not, itself, an oddly high or low valuation level.
We know to expect low returns when things are expensive, and vice versa, if you sell on any day of “typical” valuation levels.
That doesn’t make any kind of trading system, but at least we know when we can do well being indexing Bogleheads and when we’ll have to work harder.
We are definitely still in the second situation.
It also tells us the level of returns we should plan on.
Since we’re all smarter than average we all beat the market, right? But nobody should count on that.

Jim

17 Likes
10

CAPE is unambiguously a terrible predictor, for many reasons. It would have kept you out of the whole runup since 2002 except for Sept 2008 when it flashed a buy signal and then back to a sell signal the following month!

10 years ago, CAPE was in the highest quintile and the S+P has tripled since then.

There are 2 assumptions inherent in these models [CAPE/Shiller PE 10, GDodd] that are worth thinking about:
What’s the best way to compare multiples across time when inflation has been so different?
What are the implications of using the last ten years as a proxy for the future?

On the first point, note that the lowest post-war P/E multiples occurred during the 1970’s, when inflation was high. This makes some sense, since I would presumably pay a lower multiple for a given earnings stream if inflation were much higher.
When inflation is lower, earnings are worth more to me, so I would pay a higher multiple for them, as long as there is no risk of outright deflation.

On the second point, when using backward-looking models, consider what you are looking at. Such models (particularly those linked to credit markets) performed miserably in 2007, since it had been 17 years since the last consumer-led recession, and the preceding market history did not show any signs of stress. Similarly, it is worth wondering if the last 10 years of earnings history is a good proxy for the future.

Furthermore, keep in mind that the S&P 500 is a dynamic index. Since the year 2001, well over half the index has been dropped and replaced.

As a result, the earnings capacity of current S&P 500 constituents is likely to be more resilient than the actual S&P constituents over the last decade, particularly since the S&P weight to highly-leveraged financials has declined from 22% in 2007 to 11.5%.

One final issue: reported vs. operating earnings. I understand the desire by many investors to value the market based on reported earnings rather than higher-level operating earnings, given how some companies dump a lot of quasi-operating items
below the line. But over the last decade, reported earnings have fallen to a record low of 83% of operating earnings. I think it is reasonable to assume that this ratio returns to something like 88%.

tl/dr; If you use Real Earnings Yield instead of nominal earnings, and the current S+P500 instead of names that have been tossed out, you will get a much different and better answer that is a MUCH better guide to valuation. [I’d also suggest the OpEarn adj above, which can be debated.]

Naj

6 Likes
11

I don’t think we should have the right to cherry pick endpoints.
You can prove, or disprove, anything that way.

My exact point

12

CAPE is unambiguously a terrible predictor, for many reasons. It would have kept you out of the whole runup since 2002 except for Sept 2008 when it flashed a buy signal and then back to a sell signal the following month!

How about using it to vary the size of position, rather than completely in or out?

If an investor scaled their S&P position with CAPE, so that it was, say, 40/60/80% depending on CAPE they would still have some exposure in rising but expensive markets, but would benefit from taking an increased position when markets are cheaper.

SA

13

CAPE is unambiguously a terrible predictor, for many reasons. It would have kept you out of the whole runup since 2002 except for Sept 2008 when it flashed a buy signal and then back to a sell signal the following month!

Most market predictions are terrible, and CAPE is no different. Using CAPE as a sell signal does not work. There is no “correct” level for CAPE that can be used to trigger selling. But, CAPE might be an indication of future stock returns. I like the OP formula:

predicted Subsequent 10-Year Annualized Real CAGR = 1 / CAPE

This is always positive, and almost never says SELL (and go to cash). (There were 2 times when CAEY was slightly lower than real cash. In 1931 CAEY was 6%, cash was paying 1%, inflation was -7%. In 1998 CAEY was 3%, cash was paying 5%, inflation was 2%.)

A simple math formula is never going to closely predict the next 10 years. There’s just too much variability from one decade to the next, and too many surprises. The best that can be done is to reduce the variability of the prediction error. CAPE has value in setting central expectations. The path remains a drunken walk, but is restrained by long-term earnings.

Consider 10-year subsequent real returns from 1926 to 2012:

                 real     real
                  S5T   S5TBCC0   S5T   S5TBCC0
  Date     CAEY  10ySR   10ySR   Error   Error
   avg     6.7%  7.1%     8.7%   -0.4%   -2.0%
  stdev    2.6%  5.7%     4.6%   4.7%     4.2%
  10pct    3.8%  -1.5%    1.6%   -6.8%   -6.9%
avg-10pct  2.9%  **8.5%     7.0%   6.4%     4.9%**

Error = CAEY - 10ySR
10pct is the 10th percentile of 10ySR.

avg-10pct is a measure of how accurate a prediction would have been. For example, just predicting 10-year returns of 7.1% was too high by more than 8.5% in 10% of months.

Using CAEY improves the prediction accuracy.

1 Like
14

Most market predictions are terrible, and CAPE is no different. Using CAPE as a sell signal does
not work. There is no “correct” level for CAPE that can be used to trigger selling. But, CAPE might
be an indication of future stock returns.
…
avg-10pct is a measure of how accurate a prediction would have been. For example, just predicting 10-year returns of 7.1% was too high by more than 8.5% in 10% of months.

A nice summary.
As you say, a prediction is useless unless you have an idea of its likely accuracy rate.

But do look at the table up thread in post 283404.
Note that the best seven year return ever achieved starting from the most expensive bucket
was 7.2%/year lower than the worst return ever achieved starting from the cheapest bucket.
That’s considerably more than a vague hint about likely forward returns.

Of course, the end dates of the intervals are smoothed.
In effect, this assumes that you buy on a day with the CAEY in the bucket shown and sell gradually over time, spread over a long interval centred 7 years later.
Not what most of us would do, but presumably not impossible. You could do an equity ladder, rather than a bond ladder.
But you’d only want to enter such a position when the CAEY is high…which is really the whole message.

If you pay more than average for something, you’ll get back less than average in return expressed as a return on your money.
It seems trivially obvious when stated that way, but surprisingly few people believe it.
Demonstrating that it’s true is probably the single best used of CAPE analyses.
It is, rather famously, useless as the input to a market timing tool.

Jim

11 Likes
15

post 283416: Expected ~7 year real total return = 4.47 times initial trend earnings yield - 12.74%
Today’s trend earnings yield measured the same way is 3.34%
So, if valuations continue be similar to and rising at the same gradual rate as they have since 1989,
one might expect an S&P 500 total return of inflation + 2.34%/year in the next ~7 years.

I agree, one might expect a real S&P 500 total annualized return of 3.34% (CAEY or trend earnings yield) or 2.34% (regression model) over the next 4 to 10 years. This is lower than the historical average of 7% real.

I would expect +/- 4% normal variation, and +/- 7% outliers.

Maybe there are other markets with better expected returns. Maybe international (1 Euro = $1.07 today), or small cap.

1 Like
16

I don’t think we should have the right to cherry pick endpoints.
You can prove, or disprove, anything that way.
…
My exact point

Sure, but don’t miss the corollary.
If you don’t cherry pick the endpoints you get a strong and reliable conclusion.

Jim

6 Likes
17

Maybe there are other markets with better expected returns. Maybe international (1 Euro = $1.07 today), or small cap.

The UK main index, the FTSE 100 pays about 4% divi, and has held up fairly well in the recent drops, probably because it was reasonably valued, and it also has some oil and mining companies, giving some automatic diversification via commodities.
The UK midcap index (smallcap by US standards), the FTSE 250, pays about 3% divi, has better diversification than the 100 (mostly UK companies obv) and has dropped more recently but has outperformed the 100 over 30 years, so might be a good buy just now.

And the pound is relatively weak just now.

SA

2 Likes
18

Maybe there are other markets with better expected returns. Maybe international (1 Euro = $1.07 today), or small cap.
…
The UK main index, the FTSE 100 pays about 4% divi, and has held up fairly well in the recent drops…

European banks, as a general rule, are not very good businesses.
But the big ones aren’t likely to go bust, and some of them do make money year in and year out.

Santander, Unicredit, Standard Chartered and Barclays are all trading at a P/E under 5 recently.
And at these levels, the dividend yields aren’t too shabby either.
I believe all four trade in the US, one way or another.

Jim

4 Likes
19

ADRs have associated fees and tax complications. I’d also offer that bank exposure in a down cycle can be awfully dangerous, especially second and third tier banks.

1 Like
20

ADRs have associated fees and tax complications. I’d also offer that bank exposure in a down cycle can be awfully dangerous, especially second and third tier banks.

For sure.
It’s a sector that goes in and out of fashion with great exuberance.
You’d have to take the position with the mental position of holding it through any upcoming turbulence.

Nobody buys at the bottom.
Most things you buy on sale are going to get cheaper for a while.
So there’s nothing wrong with buying early, if the valuation makes good sense, because nobody knows where the bottom might be.

Those banks wouldn’t be my pick—I prefer (say) GOOGL today–but I think that slate of banks will probably do OK, given patience.
Like an excellent long term bond substitute for those who don’t look at market prices very often.

Jim

3 Likes