From 1900-1975, the average CAPE ratio on the S&P 500 was 14.7. Since 1975, the average CAPE has been 20.1. Are falling costs and increased efficiency the only explanation for this change? Of course not. That’s far too simple.
I’m sure some people will read this and ask – Wait, are you saying this time is different? No, I’m saying every time is different and markets require context. I’m also not saying higher prices or valuations are here to stay forever. More mature markets don’t mean more mature humans. Markets will continue to fluctuate but they may do so around different averages than they once did in the past, from both a gross return and valuation perspective.
- Ben Carlson
Check out the big brain on Ben!
Other factors I’d include in the discussion around why valuation averages have been creeping up for decades, in addition to collapsing investment costs:
- Aging population, longer lifespans means growing demand for equity portfolios
- Advent of the 401(k) and the concept of retirement in general
- Influx of money from newly-minted developing-market billionaires (affects luxury real estate too)
- The institutionalization of stock market investing (professional management versus the Boy Plunger)
- Larger, more well-established blue chip companies, whose shares act as quasi-bonds
- Secularly increasing profit margins thanks to technology, diminution of capital-intensive smoke stack companies
- The 30-plus trend of moderating inflation / falling interest rates
I’m sure there are other reasons but this post at A Wealth Of Common Sense hits on a big one that no one talks about.