High Stock Values and the CAPE

The cyclically adjusted price-earnings ratio (CAPE) should not be a focus around current equity price levels, according to a recent Bloomberg article. The CAPE now stands at 30, the article says, and was higher in only 59 months since 1881. “Investors are understandably concerned if it’s correct to expect the market to revert to a CAPE of about 24 over the next five years”–simple regression analysis shows that it takes an average of five years for the CAPE to revert halfway)–sending equities falling by about 22 percent, assuming earnings stay constant. “No wonder,” the article argues, “so many are waiting […]

Shiller Tracks Past Bear Markets

In a recent article for MarketWatch, Yale professor and Nobel Laureate Robert Shiller shares insights on past bear markets in the U.S. and how the current market environment resembles the periods preceding them. Citing the “conflicting messages” of “high valuations following a period of strong earnings growth and very low volatility,” Shiller shares data he collected by reviewing 13 U.S. bear markets since 1871 (a drop in the market by at least 20%) regarding each of these factors. Valuations: Using his cyclically adjusted price-earnings ratio (CAPE), Shiller points out that the current level of 30 is “high,” which could imply […]

The Pros and Cons of the Shiller P/E Ratio

By Jack M. Forehand — The Shiller P/E (CAPE) Ratio has become one of the most widely followed market valuation metrics.  It became popular during the Technology bubble in the late 90s because it provided a unique perspective on how overvalued stocks had become during that high flying period. The Shiller P/E has been popularized by Robert Shiller, a Yale University Professor of Economics and Noble Prize winner. Shiller is the author of a number of top selling books, including “Irrational Exuberance.” The Shiller P/E is also often referred to as the CAPE ratio, or the Cyclically Adjusted P/E. The […]

Shiller Says Market Valuations Warrant Caution

Nobel Laureate Robert Shiller writes in a recent New York Times article that “today’s CAPE is sending a troubling message,” noting that the market valuation ratio he developed (which now stands at nearly 30) was higher only in 1929 and around 2000 (when it hit 33 and 44, respectively). In both instances, Shiller writes, “market declines followed those very high readings.” He qualifies his comments, however, by clarifying that the CAPE “suggests a dim outlook for the American stock market over the next 10 years or so, but it does not tell us for sure nor does it say when […]

The Market Valuation Snapshot

In our Hotlist newsletter from last month we took a look at the market’s stretched valuations based on several indicators, and offered insight regarding how actions by the current administration may or may not substantiate them. The market P/E from the beginning of the year, based on trailing 12-month earnings (as of January 9th ,) was 25. We tracked other metrics as follows: Shiller P/E: 28.2, up from 25.7 as of the last update in May. This measure, which uses inflation-adjusted 10-year historical earnings to account for short-term fluctuations in profit margins during business cycles, tracked well above the historical […]