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Yikes ! Market Now At Levels Only Seen 3 Previous Times (1929, 1999, 2007) - Robert Shiller

August 20, 2014
CanadianValue

Canadian Value

120 followers

The United States stock market looks very expensive right now. The CAPE ratio, a stock-price measure I helped develop, is hovering at a worrisome level.

I wrote with some concern about the high ratio in this space a little over a year ago, when it stood at around 23, far above its 20th-century average of 15.21. (CAPE stands for cyclically adjusted price-earnings.) Now it is above 25, a level that has been surpassed since 1881 in only three previous periods: the years clustered around 1929, 1999 and 2007. Major market drops followed those peaks.

The CAPE was never intended to indicate exactly when to buy and to sell. The market could remain at these valuations for years. But we should recognize that we are in an unusual period, and that it’s time to ask some serious questions about it.

My colleague John Y. Campbell, now at Harvard, and I created the ratio more than 25 years ago. It works like this: Using inflation-adjusted figures, we divide stock prices by corporate earnings averaged over the preceding 10 years. Our ratio differs from a conventional price-to-earnings ratio in that it uses 10 years, rather than one year, in the denominator. It does so to help minimize effects of business-cycle fluctuations, and it’s helpful in comparing valuations over long horizons.

In the last century, the CAPE has fluctuated greatly, yet it has consistently reverted to its historical mean – sometimes taking awhile to do so. Periods of high valuation have tended to be followed eventually by stock-price declines.

Continue reading: http://www.nytimes.com/2014/08/17/upshot/the-mystery-of-lofty-elevations.html?_r=1&abt=0002&abg=0

About the author:

Canadian Value
http://valueinvestorcanada.blogspot.com/

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Comments

lordandmasterpa
Lordandmasterpa - 3 hours ago

Shiller has been saying this since 2011. Yes, since 2011. You're really kicking yourself right now if you listened to someone who called a market top in 2011.

One thing that differentiates 2014 from 1929, 1999, or 2007 is that corporate earnings are growing at a substantial rate. Maybe the CAPE ratio isn't the universally valid indicator that it's cracked up to be?

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