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1.Market Observations, 8.Was Sticky

21 Feb 2017 (AFR) – Two valuation methods that make shares look expensive

(21 February 2017, AFR, p26, by Philip Baker)

‘As the local reporting season rolls on two valuation methods may have more of a say about where the sharemarket goes from here. Both make stocks on Wall Street look very expensive. The first is Robert Shiller’s  cyclically adjusted  price-earnings multiple that tries to adjust for the profit cycle when setting valuations.’ <snipped…>

‘The Shiller CAPE index – cyclically adjusted price-earnings ratio – stands at around 29 points, just above where it got to in 2007 before the collapse in the US sub-prime housing collapse that ended up giving us the global financial crisis.’ <snipped…>

‘The second measure of market value lies in the junk bond market. This time last year, investors demanded close to 900 basis points to invest in junk bonds. Now, they’re happy, with just 400 basis points of additional return. The credit spread is the additional yield investors get over and above the benchmark government bond rate.’

Read more at AFR.com (might need AFR login access, or try: AFR.com/trial)

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