CAPE today: how predictable is the ratio?

Nobel Prize-winning economist Robert Shiller made a name for himself when he  predicted the dotcom bubble using his  now-famous CAPE ratio. CAPE is short for cyclically-adjusted price-earnings ratio. It’s calculated  by taking the S&P 500 and dividing it by the average of ten years worth of  earnings.  If the ratio is above the long-term average of around 16, the  stock market is considered expensive. Shiller has argued that the CAPE is remarkably good at predicting returns  over the period of several years.

As the stock market has drifted to all-time highs, prices have outpaced  earnings growth and the CAPE his risen to a notable 24 times. Some folks warn that that this means the odds  of a crash have risen significantly. Check it out:


cape chart

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