FTSE 100 CAPE ratio review
The FTSE 100 has had a tough time over the last few years, largely thanks to the eurozone crisis of the early 2010s and, since 2016, Brexit. This has kept FTSE 100 valuations relatively low compared to historic norms.
More specifically, the FTSE 100’s CAPE ratio has been below average* since the market crash of 2008/2009.
*The FTSE 100’s average CAPE for the last 30 years is just over 18. However, that period includes the largest bubble in UK stock market history (the dot-com bubble) so I prefer to use the slightly more cautious figure of 16.
In keeping with these generally low valuations, the FTSE 100 entered 2020 at a price of 7,450 and with a CAPE ratio of 15.6, slightly below that average figure of 16.
Soon after that we ran head first into a global pandemic and the stock market reacted exactly as an experienced investor would expect.
Fear and panic led to a record-breaking collapse of share prices, followed by a quick rebound driven by a more pragmatic revaluation of long-term earnings expectations.
At the moment of maximum panic (March 23rd) the FTSE 100 fell below 5,000, a level first reached in August 1997, almost exactly 23 years ago.
When prices decline the CAPE ratio also declines, and with the FTSE 100 at 5,000 in March that gave the large-cap index a CAPE ratio of 10.3.
10.3 is significantly below the average CAPE of 16, suggesting that the FTSE 100 was likely to be very good value at that price.