In your first figure, are the “adjusted earnings over the last 10 years” adjusted for inflation? When looking at current earnings and price, inflation may not matter (if it isn’t changing really quickly), but comparing earnings from 10 years ago to the price today, when there has been a recent sharp increase in nominal prices, could be misleading.
Note that the stock market is somewhat of an inflation hedge, since it (to some extent) represents ownership of real assets. Of course, an inflationary environment is generally bad for the economy as a whole, so one would expect real stock values to decline, but not necessarily nominal stock prices.
The bond yields in your second figure are obviously not adjusted for inflation (ie, they are nominal yields, not real yields after inflation). So I’m not sure one can draw much of a conclusion from it.
By the way… For those squinting at the figures, note that in Firefox one can right click and open the image in a new tab, where it’s bigger. May be possible in other browsers too.
The bond yields in your second figure are obviously not adjusted for inflation (ie, they are nominal yields, not real yields after inflation). So I’m not sure one can draw much of a conclusion from it.
That’s true, I should have used a chart with real interest rates (I chose that specific graph because it was the one that made the problem salient for me when I had first seen it).
However, with real interest rates it looks similar:
That’s not a chart of “real rates”, that’s the spread between a 10y rate and a spot inflation estimate. Real rates is (ideally) the rate paid on an inflation linked bond, or at least the k-year rate minus the k-year forecast inflation. The BoE have historic data here going back to ’85 and the rally is several hundred basis points less than your chart implies.
are the “adjusted earnings over the last 10 years” adjusted for inflation?
Generally CAPE past earnings are adjusted to inflation.
Historically the stock market has responded badly over time to a rapid change upwards in inflation particularly if interest rates rise correspondingly, due to valuation effects (“net present value”) . Subsequently once the market has fallen it tends to act as a reasonable inflation hedge. Typically this occurs around the point when Time Magazine has a front cover saying something like “The Death of Equities”.
Different stocks respond differently to inflation. Consider the analogy of the Nifty Fifty of the late 1960s and the high flying tech stocks of today.
In your first figure, are the “adjusted earnings over the last 10 years” adjusted for inflation? When looking at current earnings and price, inflation may not matter (if it isn’t changing really quickly), but comparing earnings from 10 years ago to the price today, when there has been a recent sharp increase in nominal prices, could be misleading.
Note that the stock market is somewhat of an inflation hedge, since it (to some extent) represents ownership of real assets. Of course, an inflationary environment is generally bad for the economy as a whole, so one would expect real stock values to decline, but not necessarily nominal stock prices.
The bond yields in your second figure are obviously not adjusted for inflation (ie, they are nominal yields, not real yields after inflation). So I’m not sure one can draw much of a conclusion from it.
By the way… For those squinting at the figures, note that in Firefox one can right click and open the image in a new tab, where it’s bigger. May be possible in other browsers too.
That’s true, I should have used a chart with real interest rates (I chose that specific graph because it was the one that made the problem salient for me when I had first seen it).
However, with real interest rates it looks similar:
That’s not a chart of “real rates”, that’s the spread between a 10y rate and a spot inflation estimate. Real rates is (ideally) the rate paid on an inflation linked bond, or at least the k-year rate minus the k-year forecast inflation. The BoE have historic data here going back to ’85 and the rally is several hundred basis points less than your chart implies.
Generally CAPE past earnings are adjusted to inflation.
Historically the stock market has responded badly over time to a rapid change upwards in inflation particularly if interest rates rise correspondingly, due to valuation effects (“net present value”) . Subsequently once the market has fallen it tends to act as a reasonable inflation hedge. Typically this occurs around the point when Time Magazine has a front cover saying something like “The Death of Equities”.
Different stocks respond differently to inflation. Consider the analogy of the Nifty Fifty of the late 1960s and the high flying tech stocks of today.