CAPE Ratio Hits Record High: Investors Take Defensive Stance
The Shiller CAPE ratio has hit its second-highest level on record at 41.5, only surpassed by its peak of 44.2 in 1999. This metric measures how expensive stocks are relative to a decade of earnings and has only been above 40 one other time over the last 150 years.
Historically, this high CAPE ratio has foreshadowed bear markets, including the dot-com bubble burst and the 2022 market downturn. Given these precedents, the author is taking this warning sign seriously by building more defensive holdings in their portfolio.
The author is particularly drawn to Berkshire Hathaway (BRKA), Procter & Gamble (PG), and Realty Income (O) due to their defensive qualities and ability to perform well during market downturns. Berkshire's diversified portfolio of cash-generating businesses, including insurance, rail, utilities, energy, and manufacturing, generates significant earnings that can be reinvested or used to repurchase shares at lower prices.
Procter & Gamble is another classic defensive holding with a strong track record of resilience during market sell-offs. Its consumer staples business includes iconic brands like Dawn, Gillette, Pampers, and Tide, which maintain steady demand despite economic fluctuations.
Realty Income's diversified portfolio of retail, industrial, gaming, data center, and other properties secured by long-term net leases with leading companies provides a stable source of rental income. The REIT has outperformed the S&P 500 during 11 of its 13 corrections since its public listing in 1994.