US CAPE and q chart

US CAPE and q chart for Q4 2021.

The q data are updated to 31st December 2021, but the CAPE data are based on EPS up to 30th September 2021 as Standard & Poor’s have ceased publishing their estimates for the next quarter.

As at 31st December the S&P 500 was at 4766.18 and US non-financials were 246% of fair value according to q; quoted shares, including financials, were 144% according to CAPE. (It should be noted that I use geometric rather than arithmetic means in these calculations.) As at 18th March 2022, with the S&P 500 at 4463.12, to be at fair value US equities would need to fall by 57% according to q and 26% according to CAPE.

The large divergence between the q and CAPE valuations of the stock market only previously occurred in 1928. In the paper published on this website on 5th January 2022, US – The High Risk of Another Financial Crisis, I suggest that, as q applies only to non-financial companies, the most likely explanation for this divergence is the exceptionally high levels of profit margins in finance in both 1929 and 2021, which is illustrated in Chart 2. ( see "Latest q & CAPE data sheet").

As high financial profit margins are most likely due to a high level of risk, they add to the indications provided by the stock market’s overvaluation, that there is a substantial risk of another financial crisis.

Data for my calculations of q are taken for 1900 to 1952 from Measures of Stock Market Value and Returns for the Non-financial Corporate Sector 1900-2002 by Stephen Wright, published in the Review of Income and Wealth (2004) and for 1945 to 2021 from the Financial Accounts of the United States (“Z1”) published by the Federal Reserve. Data for our calculations of CAPE are taken from the data published on Robert Shiller’s website, updated if necessary from data published by Standard & Poor’s. Data on net worth are only available annually before 1952 and I have calculated the quarterly data by interpolation assuming that changes are evenly spread over each year. Market value data are calculated by adjusting the year-end figures for the quarterly value of the S&P 500 or its equivalent as shown by Robert Shiller.

Data Changes.

There have been large changes in the data published by the Federal Reserve in its Z1 Table B.103. “The equity components of foreign direct investment in the U.S. and U.S. direct investment abroad, which are no longer included in total liabilities outstanding on levels tables and balance sheets, are now shown as memo items where appropriate (Tables L.100, L.102, L.103, L.104, L.108, L.110, L.111, L.112, L.115, L.116, L.116.g, L.128, L.130, L.132, and L.133). Corporate equities and proprietors’ equity in non-corporate business outstanding, which were not included in liabilities in previous publications, are also shown as memo items on the level tables where available.” The market value of total corporate equities outstanding for domestic financial institutions is shown in Table L.108; however, estimates are not available for every financial subsector (L.109-L.132). The balance sheets and measures of net worth of non-financial corporate business and non-financial non-corporate business (Tables B.103, B.104, R.103, and R.104) have been adjusted accordingly.

Non-financial corporate business sector data (Tables F.103, L.103, B.103, and R.103) have been revised from 2019: Q1 forward to reflect new benchmark data from the Internal Revenue Service Statistics of Income for 2019.

I am grateful to Derry Pickford for pointing out that those using that annual Z1 B.103 data should note that there is a discrepancy between the quarterly and annual data. He received the following email from the Federal Reserve. “Thank you for your inquiry into the Financial Accounts of the United States. Regarding B.103 line 44, as well as line 45 and 46. The annual values appear incorrect. I can confirm that the quarterly year-end Q4 values are correct and you should use those and disregard the annual series while we investigate this data problem.”

Data Calculation.

The latest data separate the equity and debt elements in the value of foreign direct investment (“FDI”) in US non-financial companies. I had previously been deducting the value of FDI from US company net worth, but this appears to have involved the debt element in FDI being deducted twice and thus understating the net worth of US owned companies.

I now derive net worth by dividing Z1 line 40 (Value of US owned non-financial companies) by the ratio of net worth to market value (Line 44/100).

Chart Presentation.

I have revised the presentation of the data so that over and undervaluations are shown as log percentage differences. This allows over and undervaluations to appear proportionate. For example, a market which is log 100% overvalued needs to halve to be at fair value and one which is log 100% undervalued needs to double.

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