A lot of people look at this bull market, valuations, and think somehow that value has forsaken us. And that the much discussed CAPE ratio doesn’t work. They look at the CAPE ratio, at a current value of about 30 in the US, and think somehow that markets rising along with multiples expanding somehow invalidates the CAPE ratio. (We’ll ignore for a second the fact the CAPE ratio hit 13 in 2009, signaling under valuation.)
They have it backwards. This is how it is supposed to work. This is how it has always worked.
Take a look at global stock market returns since I published by Global Value white paper and book. We’ll use start of 2013 – 5/2017. Using valuation worked incredibly well. The cheap stuff outperformed the expensive stuff. Notably there were a few outliers, but for the most part it looks like a pretty normal quant scatterplot…Only one stock market that started the period at a CAPE ratio > 20 had positive returns…and guess who that was?