US equity CAPE at a 13-year high - time to sell?

Added 11th April 2017

The cyclically adjusted P/E ratio of the S&P 500 is at its highest level since 2004. What does that say about return prospects for US equities going forward? Gabriel Bartholdi, head of asset allocation at Swiss consultancy firm Wellershoff & Partners, gives his view.

Bartholdi says that the expected 5-year annualised return for US equities currently is between 0 and -1% based on cyclically adjusted price earnings ratios.

"So there is no potential anymore in US equities anymore," he asserts.

However, cyclically adjusted P/E isn't a reliable metric on the short term. Over the (very) long term, US equity CAPE will come down, "but I can’t really tell whether that wil happen in one year, in five years or in 10 years. Mean reversion can take a long time," says Bartholdi.

"Only if your investment horizon is 10-20 years, using CAPE really has an added value."

Bartholdi therefore doesn't use CAPE as a guide to his tactical asset allocation. "If you had implemented a trading rule based on CAPE, you would have underperformed a buy-and-hold strategy over the past 20 years," he says.  

 

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