After 35 years, the Japanese stock market has finally reached new record highs. You can see the moment on the chart below when “Abenomics” was introduced in Japan:
Abenomics was a “three quiver” approach to try and boost the markets and economy. It involved (1) structural reforms (2) deficit spending and (3) massive money printing:
The other thing that helped start the rally in Japanese stocks back in 2012 was a low price to earnings valuation.
The CAPE ratio (Shiller Price to Earnings ratio) reached 80 at the peak of Japan’s stock market bubble in 1989. That means investors were willing to pay 80 times the average earnings over the previous 10 years. The price to earnings ratio bottomed in 2012 at 16.
Investors once willing to pay 80 times earnings now wanted nothing to do with stocks paying 16 times earnings. There was extreme pessimism and investors (after being destroyed in the market for 23 straight years) understandably had given up.
Here are some other high-water marks for the CAPE Price To Earnings ratio in other stock markets over the last 35 years:
In 1998 Switzerland reached 58.
In 2000 Germany hit 58. Canada, France, Germany and Italy all crossed 60, while Sweden hit 80.
In 2007, China hit 60 and India reached 48.
Just like Japan, all of these countries have experienced horrific returns since their price to earnings valuation peaks. Some are still well below their all-time highs, 17 to 26 later.
The United States stock market reached 47 in March 2000 at the peak of the dot com bubble. It reached 39 in late 2021 and sits around 34 today (February 2024). It’s currently one of the most expensive stock markets in the world.
The following is a quick snapshot/summary of where price to earnings valuations stood for countries around the world entering 2024:
Average of Foreign Developed Countries: 19 (38% less expensive than the United States)
Average of Foreign Emerging Countries: 15 (51% less expensive than the United States)
What does this mean for the United States stock market moving forward? Reviewing the history of other stock market bubble peaks above, there is plenty of room for valuations to go much higher from where they are today.
Fortunately for us, we don’t have to invest in an expensive stock market (the United States). We can invest in other markets around the world that are much less expensive, typically pay higher dividends, and offer a higher probability of stronger returns relative to the U.S. moving forward.
Tuna Thoughts 