Shiller Says Bull Could Run for a While

When asked for his outlook on the market in a recent CNBC interview, Nobel Laureate Robert Shiller says investors should keep some stocks in their portfolio because the market “could go up 50 percent from here.” The economist, who helped develop the cyclically-adjusted price-to-earnings ratio (CAPE) market valuation measure, says that although the current CAPE (29) is above the 17-year historical average, he isn’t calling for a market decline. That said, he notes that diversification outside the U.S. would avail investors of lower valuations. “You can go practically anywhere else in the world and it’s lower,” he argues. The CAPE […]

There’s a Hole in the CAPE Ratio

When predicting future real returns of stock markets, the cyclically adjusted price/earnings ratio (CAPE) is a good place to start. The formula, first proposed by guru Benjamin Graham, is pretty simple: the current price of a stock market (or single stock) divided by the average earnings of the last 10 years (both adjusted for inflation). An article in this month’s “Enterprising Investor” speaks to how this calculation has recently come under scrutiny. Wharton professor Jeremy Siegel contends that accounting changes effected in the early 1990’s have resulted in artificially low earnings numbers and, subsequently, artificially high CAPE ratios. This has […]