#136: We All Need A Handbrake

S2N Spotlight

My wife always tells me I need a handbrake. Don’t tell her, but it is true. It’s easy to get caught up in the moment and lose sight of what’s fair and reasonable. Relying solely on price action is like driving down a dark highway with your headlights off—focused only on moving straight ahead. Eventually, you’ll crash because no road goes perfectly straight forever.

At the end of January 2024, Quandl, a well known data vendor stopped updating its database with data from Nobel Prize winner Robert Shiller’s site, https://www.multpl.com I had built my valuation model with data coming from the Quandl api and I have just not found an alternative free data source with an api. This is the beauty of Python, they have a very easy to use web scraping library called “BeautifulSoup.” Today I made the time to scrape the necessary data to plot the charts I am going to share below. I am pretty excited to explore some of the other data series for some interesting future research.

Let’s get to work.

If you work with one of the more traditional valuation methods the simple PE ratio of the S&P 500 you get the following picture from data going back to 1871. The 2000 PE ratio was a high valuation telling us something, but nothing compared to the outlier in 2008 which wasn’t telling us anything it was screaming. The traditional PE ratio is a lot more volatile and therefore I like to work with the Shiller PE ratio that is smooth like Frank Sinatra in his heyday.

The Shiller PE ratio takes the last 10 years of earnings to calculate the PE ratio, this method smooths the earnings from what could be shortish exceptional spikes causing potential false alarms.

I am going to share the chart with a linear scale of the S&P 500, remember I am working with the inflation-adjusted S&P 500 and earnings. Not bad. The problem with working with a linear chart that goes back so far is that it doesn’t give as good an indication of the relationship with the ratio as you get when looking at a log scale.

I am not going into explaining the difference. If you compare this chart to the one above. The relationship really jumps out at you. Valuation extremes are as the name suggests extremely hard to time. Trading valuation on its own without an extremely long time horizon will probably result in severe underperformance. I am not going to make any predictions other than the S&P 500 is very expensive.

S2N Observations

Here is a year-to-date look at the price journey of a few key world stock indices. China still lagging. Hang Seng has picked up though. I still stand by my long China via Hong Kong’s Hang Seng short S&P 500.

Performance Review

Chart Gallery

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