Category: Market valuations

After an extremely bumpy 2020, the FTSE 100 has recovered and is now close to record highs.

After a roller-coaster first half of 2020, now seems like a good time to review the CAPE ratio for the FTSE 100, FTSE 250 and, for US-focused investors, the S&P 500.

In this article I look at the S&P 500’s response to the coronavirus pandemic, the impact on CAPE valuations and what that means for the index’s expected ten-year returns.

The world is in the grip of a rapidly expanding pandemic and countries around the world have shut down large parts of their economies and told citizens not to go outside.

The International Monetary Fund (IMF) now expects a global recession far worse than the one that followed the financial crisis and worse than any since the great depression.

Companies left, right and centre are suspending dividends and reporting revenue declines of more than 80%.

And yet despite the obvious damage being done to the global economy, the S&P 500 is not even in bear market territory.

Unless you are a hermit living in a very remote cave, I’m sure you’re aware of the coronavirus pandemic.

And if you have any interest in investing, then you also probably know that stock markets around the globe have suffered what can only be described as a stock market crash.

Crash is a strong word, but with the FTSE 100 falling 26% (from 7,500 to 5,500) in less than a month it’s hard to call it anything else.

Technically speaking we are now in a bear market, which is somewhat arbitrarily defined as a decline of more than 20% from recent highs.

What does this mean for investors? Should we sell now and hide under a rock, or is there some alternative?

Mean reversion of market valuations will be one of the primary headwinds or tailwinds affecting your portfolio over the long term. In this article I look at the FTSE 250’s cyclically adjusted PE ratio (CAPE), and whether it’s likely to help or hinder your portfolio over the coming decade.

In this article I calculate the cyclically adjusted PE ratio (CAPE) for the FTSE 100, compare the current value to its historic average and forecast the index’s expected value in 2030.

We’re about halfway through 2019, so now is a good time to stop, smell the roses and see how attractively valued (or not) the FTSE 100 and FTSE 250 are.

I’ll be estimating fair value for these indices using their dividend yields and CAPE ratios (Cyclically Adjusted PE), because I think the standard PE ratio is basically useless as a valuation too.

For most UK stock market investors, 2018 was not a year to celebrate.

The FTSE 100 fell by 12% from 7,648 to 6,734, which left the large-cap index at levels first reached almost 20 years ago in 1999.

The FTSE 250 faired even worse, suffering a 15% decline from 20,681 to 17,587.

On top of that, we’ve had a seemingly endless stream of fear-based highly negative ‘news’ from the financial and mainstream media. Most of this relates, of course, to the various dystopian futures which were may or may not be subjected to if Brexit ever actually takes place.

In such a negative environment, is there any positive news we can cling to, if only to maintain our sanity?

I think there is, and it’s this:

According to the dividend discount model, the FTSE 100 could be trading far below its intrinsic value

If that sounds like a load of gobbledegook, please allow me to explain.

Is the UK stock market cheap or expensive compared to historic norms? And are its returns over the next decade or so likely to be good, bad or ugly?

To find out, I’m going to look at the current valuation of both the FTSE 100 and FTSE 250. After that, I’ll wrap things up with a long-term forecast for both indices.

Average property prices in the UK are at historic highs and this is not good news for future house price gains.

Why? The short answer is that trees don’t grow to the sky. The longer answer is a bit more complicated but very interesting.

Who’s right about the UK stock market?

• Is it the bulls, who think the UK market is attractively valued and could easily double if investors fall in love with stocks again?
• Or is it the bears, who see the FTSE 100 at record highs and a near-decade-old bull market which must be well into old age by now?

Over the last 20 years, the performance gap between the FTSE 250 and FTSE 100 has been enormous.

While the FTSE 100 has spent most of the last 20 years failing to beat its dot-com peak, the FTSE 250 has raced ahead. In fact, it’s now almost three times higher than it was during the tech bubble.

So what does that say about the FTSE 250’s valuation today? Is the FTSE 250 in some kind of runaway bubble fuelled by quantitative easing and super-low interest rates?

2017 is drawing to a close, so once again it’s time for my semi-regular UK stock market review.

In this case, I’ll be looking at the FTSE 100’s current valuation and making a fact-based forecast for 2018. I’ll also use that same approach to make a forecast for the next decade.

In my opinion, the FTSE 100’s valuation is more important than any forecast, so let’s have a look at valuation first.

We’re halfway through the year so that can only mean one thing: It’s time to re-calculate fair value for the FTSE 100 and dip a toe into the mystic world of stock market forecasts.

Today the FTSE 250 stands about 50% above its pre-financial crisis highs and more than 200% above its post-crisis lows.

Those are impressive gains, but has it left the mid-cap market overvalued? I think it has, and the implications for expected future returns are not good.