This is an original press statement released December 2019.
Subject: Are stock-markets stable? A view from the CAPM theory.
Prices on almost all stock-markets went up in 2019. The usual comparison below between the theoretical unleveraged PE ratio and the latest actual price/earnings (PE) ratios in various countries, indicates healthy corrections.
The theoretical foundation of that comparison is based on the generally accepted Capital Asset Pricing Model (CAPM). That theory states that the correct discount rate in share valuation is the sum of a risk free interest rate + a risk premium.
Column 1 contains the most recent risk premiums, based on the longest possible period (since 1900) as an average of all 7 calculation methods. Column 2 contains the risk free long term interest rate for long term government bonds at the start of the year. Column 3 contains the sum of both and column 4 the reciprocal, an unleveraged Capitalized Discount rate or theoretical PE. Column 5 represents actual PE-ratio's based on 2018 net company profits in each major local index. The last column 6 deducts column 5 minus 4, showing the difference between the theoretical unleveraged PE-ratio minus the actual PE. Positive differences in black hint at undervaluation, negative ones are shown in red and hint that markets are overvalued. However, before jumping to conclusions, some other factors should be taken into account.
Based on the facts above, the recent upwards stock market corrections in 2019 look more like a healthy correction on strong price decreases in 2018. Only in the USA remaining buffers to withstand panic became more fragile or gone.
For any question please Email. All information is based on sources deemed to be trustworthy. All forward looking statements are subject to all required qualifications. Not any responsibility is taken for any conclusion.