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back as far, though China’s ECY is somewhat elevated, at about 5%. This indicates that, worldwide, equities are highly attractive relative to bonds right now. The only other time ECYs were this high using our global data was in the early 1980s. That period was characterized by depressed equities with cheap valuations, high interest rates, and high inflation. CAPE ratios for the five regions were in the low teens back then, compared with levels in the twenties and thirties now. These conditions are almost the opposite of what we see today: expensive equities and exceptionally low real interest rates. We cannot know how the COVID-19 pandemic will end, and it may well end soon with the advent of effective vaccines. But a key takeaway of the ECY indicator is that it confirms the relative attractiveness of equities, particularly given a potentially protracted period of low interest rates. It may justify the FOMO narrative and go some way toward explaining the strong investor preference for equities since March. Eventually, down the line, bond yields may just rise, and equity valuations may also have to reset alongside yields. But, at this point, despite the risks and the high CAPE ratios, stock-market valuations may not be as absurd as some people think.
Robert J. Shiller, Laurence Black, and Farouk Jivraj are regular contributors to Project Syndicate. ©
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American Consequences
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