This post is co-written by Elliot Turner and David Doran
There’s been a great conversation in the blogosphere specifically about the validity and predictive power of Cyclically Adusted P/E Ratios (aka CAPE) and more generally about the valuation of US equities. The incredible run of the last year has only made the valuation debate more important. John Hussman has been one of the more vocal advocates on the Bearish side, while the pseudonymous @JesseLivermore from the Twittersphere has done an outstanding job deconstructing CAPE. In doing so, @JesseLivermore has highlighted why CAPE might not be relevant along with presenting an alternative way to look at valuation.
Since its founding by Will Thomson and Chip Russell in June 2016, the Massif Capital Real Asset Strategy has outperformed all of its real asset benchmarks. Since its inception, the long/short equity fund has returned 9% per annum net, compared to 6% for the Bloomberg Commodity Index, 3% for the 3 MSCI USA Infrastructure index Read More
We think indicators like the CAPE offer valuable information, though they can never be looked upon conclusively. Further, we think that no one indicator has any worth outside of context. In an effort to simplify, context is often underappreciated in the investment community.
One key area where CAPE fails to ascertain the context is how it thinks about the valuation of businesses. Since the CAPE deals with P/E, it is purely a reflection of the price of a security,