What use are equity valuations? This is one question posed by stock markets’ reaction to this crisis.
A few weeks ago it was generally thought that US shares were expensive while UK ones were cheap. The cyclically-adjusted earnings yield on the S&P 500 and the dividend yield were well below their long-term averages while the dividend yield on the All-Share index was above its average. And yet since the S&P 500 peaked on 19 February it has actually fallen less than the All-Share index – and (given the fall in sterling) by much less if we measure the two indices in a common currency.
This isn’t the only way in which valuations have misled us. At the start of the year, stocks as otherwise diverse as Tullow, Marstons and Hammerson were all on apparently attractive yields. But their prices have since fallen by more than half.