Market Overview 22/12/2020

Global equity markets were mostly up last week, with the US posting another series of all-time highs on Thursday. Optimism about vaccine rollout and signs that the long-awaited US stimulus package was about to be signed off contributed to the positive tone. In the UK, the pound strengthened as the mood music over a Brexit trade deal improved. Sunday evening did indeed see Congress agreeing a $900 billion relief plan which will once again include direct payments to households as well as supporting small businesses. However, this was overshadowed by the news that parts of the UK were moving into a new tier of COVID-related restrictions and that citizens’ movements around Christmas would be significantly curtailed. A new strain of coronavirus looks to have a higher transmission rate and has been spreading fast in the south-east of England. Monday saw the pound and the stock market fall sharply as concerns over the possibility of another prolonged lockdown rattled sentiment. What a hugely disappointing end to the year.

Many commentators have looked at stock market valuations and pointed out that they look expensive relative to history. One of the famous measures is economist Robert Shiller’s Cyclically Adjusted Price Earnings ratio (CAPE). This has proven to be a good historic indicator of value but less robust as a market timing tool. At present the US CAPE p/e ratio is 33 – the highest it has been for decades. Nonetheless it has been high for a long time, which has prompted Shiller to rethink. He has now come up with an alternative metric called the Excess CAPE Yield (ECY). This now takes the inverse of his famous p/e ratio, the earnings yield, and deducts the inflation adjusted bond yield. This results in an ECY of 4% for the US market, prompting Shiller to comment last week that “equities are highly attractive relative to bonds right now.” While this is undoubtedly true, I may not be alone in being a little nervous when a highly respected figure completely changes their view!