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CAPE Ratio is the 10-year average of the Price/Earning ratio used to calculate the value of stocks, taking into account inflation. First of all, I will deal with the concepts in this definition one by one. Afterwards, I will focus on the Fair Value CAPE valuation model used by the Vanguard investment company, and I will talk about the fact that there is a serious low return expectation in the markets for the next 10 years. I will comment on how this expectation will affect BitCoin .
Price/Earnings ratio is the calculation of a stock’s earnings per share ratio. Earnings per share is simply calculated by dividing the net profit of the company by the number of shares at the end of the period. If a stock’s P/E ratio is too high for long, it means that stock is overvalued. Similarly, by looking at the P/E ratios of the indices, it is possible to see whether the stock market as a whole is overvalued.
However, in 2002 and 2008, this figure saw 45 and 65 levels, after which the markets entered a serious recession period. It is possible to see this in the table below.
If we need to give examples for companies, the companies with very high future returns will have a high P/E Ratio
, while the rate of companies with relatively low expectations will be low.
Okay 3 As of March 2022, the current P/E Ratio of the big companies that everyone knows?
Amazon: 47 Apple: 27 Google: 24 Microsoft: 32 Facebook (META): 15 (due to the recent serious decline) Tesla: 179 (typo There is no!)
If we leave the company specific and return to the general market valuation, we will see periodic volatility. Since the P/E Ratio provides short-term data, Yale University Economics professor and Nobel Prize winner Robert Shiller developed the CAPE Ratio valuation model to reduce the effect of market cycles and reduce the effect of inflation to zero. This is also known as Shiller PE Ratio. Derived from the initials of Cyclically Adjusted PE Ratio, CAPE Ratio basically takes the P/E ratio of the last 10 years (adjusted for inflation) and gives us an idea of what we should expect from the markets in the next 10 years.
So, what kind of an idea does the CAPE Ratio give us about the retrospective market analysis? Source: https://www.multpl.com/shiller-pe
As can be seen in the table above, the CAPE Ratio was able to detect the bubble caused by the overvaluation of technology stocks in 2000. The same ratio indicates a high rate of appreciation for the year you are in.
As I mentioned above, the CAPE Ratio only takes into account the 10-year P/E Ratio and inflation. However, another factor affecting the valuation of the markets is interest rates. Considering that the US 10-Year Bond interest rates are an important data on how cheap or expensive the money in the market is, Vanguard investment company added the interest rates to the CAPE Rate and created the Fair Value CAPE Rate. You can see from the chart below that the US interest rates have been in a downward trend for the last 40 years.
I think it is a very correct approach for Vanguard to add the effect of interest rates to the CAPE Ratio.
In other words, there is a very serious difference between the market’s valuation by the P/E Ratio in a period when the US 10-Year Bond interest rate is 10% and the appreciation of the interest rate in a period of 2%. So what does the current period tell us about the markets, according to the Fair Value CAPE Ratio? Source: Vanguard economic and market outlook for 2022
As seen in the table above, when the interest rates are taken into account, when we look at the calculation on September 30, it is obvious that there is an excessive appreciation in the markets. Strangely enough, even though the S&P 500 increased by 11% between September 30, 2021 and today (March 1), it returned all these returns and returned to its level on September 30.
Well, this valuation analysis tells us what does it mean?
The fact that the market is overvalued today does not mean that there will be a serious decline in the market in the next 1-2 years. Although the Fed’s monetary tightening period will start this month, it may be expected that the markets will be adversely affected, as borrowing costs will increase even more, but it is very difficult to predict how the markets will move in relatively short periods such as 1-2 years, according to the CAPE datastrong> As a matter of fact, this valuation model does not give us an idea of short-term movements anyway.
As can be seen in the table below, the average annual income expectation from the S&P 500 in the next 10 years is only 3.3%.
Source: Vanguard economic and market outlook for 2022
How will it affect BitCoin ?
While the expectations from the markets for the next 10 years are so low, investors will take more risks (as seen in the last two years) and turn to investment instruments with higher risk. Since bond interests will yield yields below inflation, they will definitely be removed from the table for a long-term period like 10 years. If professional long-term investors expect an average annual return of 3.3% for the next 10 years from the stock market, then this will lead investors to assets with a much higher potential and positive separation potential, such as BitCoin . For this reason, it is a long-term investment for corporate companies to add BitCoin to their balance sheets.