TINA, or ‘There Is No Alternative’, to lower rates is the theme of the day. Bloomberg senior market editor, John Authers, wants a renewed focus on Shiller’s CAPE measure of equity valuation. This uses ten-year trailing earnings of stocks rather than just one year. Recently the measure has started to decline as the poor earnings of the 2007-8 crisis years are falling out of the trailing window. But that could prove temporary as the outlook for earnings season is gloomy – 80% of companies have guided lower, often citing trade tensions. Instead, it appears valuations are becoming more reliant on low interest rates (see chart below). Authers believes emerging markets could be the outperformer in this context and he remains perplexed by negative yields on high yielding corporate debt and several EM debt markets.
Why does this matter? Some have clung to a drop in CAPE as a supportive factor for equities, but that decline is probably temporary. Instead, valuations are entirely reliant on rates staying low for long.
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