No. of Recommendations: 19
On the other hand, the price/sales ratio and the CAPE ratio of the S&P500 is near an all-time high.Since 1880 the market has been at a lower valuation of 10 year real average past earnings more than 97% of the time.
So investing from this particular market high likely won't have an above average 5 year return.
Based on monthly data, starting the beginning of 1950, the rolling 5 year average SP500 (GTR1 ^S5T) return is 1.77. The median is 1.74. The range is 0.67 to 3.58.
When CAPE exceeds the 97th percentile, the 5 year average return is 1.32 and median is 1.10. The range is 0.833 to 2.93
So yes, the average subsequent 5 year return is less when CAPE exceeds the 97th percentile, but is it less than the alternative investment?
The most recent time when CAPE exceeded 97th percentile with a subsequent five year return was Nov, 2017. SPY was 236.95 and 5 years later was 397.22. Interest rates were low, so in hindsight, taking the SPY investment resulted in a higher return.
As a timing model, being out of SP500 when CAPE exceeds the 97th percentile is not as good as being fully invested all the time. From the beginning of 1950 $1 becomes $3,576 when fully invested and becomes $1,233 when out of the market and getting 5% pa when CAPE exceeds the 97th percentile.
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