Expensive shares?

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End of year rally

At the beginning of November, the fairs started an astonishing end-of-year rally. In disbelief, economists and investors are watching the ever-increasing share prices. On Wall Street, leading brokers and asset managers are struggling to keep up with the raging pace. For example, the websites of Merrill Lynch, Charles Schwab, and Robinhood – not least in online trading – went black in November. The founder of Interactive Brokers even allowed himself to be told that he had never experienced such madness on the stock exchange. And he, too, has been around for a while.


Clearly, since the presidential elections and the announcement of various vaccines against corona, there has been an unprecedented euphoria about the markets. Alarming noises are therefore being heard from all sides about shares that are far too expensive. Shares are said to have reached historically high prices and are ripe for a sharp fall. The first is undeniable. The valuation of shares has reached a level only seen in 1929 and 2000. Years which, incidentally, are never mentioned without reason, because every experienced investor knows what battlefield followed on the stock market.

A fuse and the powder keg

It is true that equities are not very cheap, but does that also mean that there is a substantial fall in prices? A high valuation of shares has never in itself been a reason for a crash. Admittedly, there is a powder keg waiting. However, the fuse in the powder keg has to be lit first. And the fire is still missing. At the beginning of this year, for example, shares were very expensive. However, the flame only hit the pan when a virus broke out unexpectedly all over the world. In three weeks, the markets lost more than 30% of their value. The price/earnings ratio on the stock exchange fell from extremely high to below average. Subsequently, low prices were not in themselves a reason to rise again. Another catalyst had to be found from outside to rekindle the fire. That was the Federal Reserve.

Expensive is relative

But are shares historically expensive? Measured in QE ratios compared to the average over the last 100 years or so, certainly. But the value of investments should always be seen in relation to the value of their alternatives. Alternatives to an investment in shares include bonds and a savings account. And then the story suddenly becomes very different. For example, the profit return – the reverse of the KWR ratio – for shares in the S&P 500 index is currently 3.41%. That is less than half of the historical average of 7.16%. However, over the past 100 years, the profit return has on average been around twice as high as the interest rate on 10-year government bonds. Today, however, it is more than 3 ½ times as high. In other words, because interest rates are so low, equities are rather cheap.


A story that is endorsed by not the least in the financial world, namely Nobel Prize winner Robert Shiller. This well-known professor of economics at Yale University foresaw a major blow to stock markets in both 2000 and 2008. This time, however, he is remarkably less gloomy. His CAPE (Cyclically Adjusted Price Earnings) ratio may well be at an alarmingly high level. However, he admits that CAPE does not take the low-interest rates into account. That is why he devised a new ratio, ECY. ECY does take the low-interest rates into account and endorses the above statement that equities are not as expensive as it is claimed to be.

Later concern

Can investors now continue to buy shares with peace of mind? Probably as long as interest rates remain at their current low levels. After all, as soon as interest rates start to rise, the alternatives to investing in equities will become much more interesting. And the money can go somewhere else. The consensus in the market assumes that interest rates will remain low for a longer period of time. But whether that scenario will actually come true depends on the development of inflation. It is still very low at the moment. How much longer? And how will central bankers combat rising inflation in the future? For many investors, however, this is a matter of later concern.

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