Shiller: Stocks Not Yet Cheap Enough for Me
By Barry Ritholtz - February 24th, 2009, 9:15AM
Yale professor Robert J. Shiller, the author of “Irrational Exuberance,” created one of the most useful and predictive measures of stock-market valuation: the cyclically-adjusted price-earnings ratio (CAPE).
As Professor Shiller explains here, the CAPE mutes the impact of the business cycle by averaging 10 years of earnings. It thus provides a good picture of the market’s value regardless of where we are in the business cycle.
Yahoo, Feb 23, 2009 08:00am EST
February 24th, 2009 at 11:05 am
Not the best method for comparison between long ago periods and more modern periods of time, since P/E valuations tend to rise over time (even with earnings adjusted for inflation and averaged over rolling 10 year periods). I would describe the approach as being more of a kind of pseudo-dividend. In that respect, Shiller’s method works, but it certainly has limitations.
Ultimately, using dividends works better for determining appropriate values for stock prices.
February 24th, 2009 at 12:59 pm
You can interpret that chart from Bronson as P/E valuations rising over time or you could say we are way, way overdue for some “two-fers”, meaning P/E = 2. The Fed has done everything and will continue to do everything to maximize valuations for equities – in fact, that’s its role, right? – and the irony is that if the dollar collapses as a result, maybe we will get our “two-fers” after all.
Still, I know most of the people on this blog are smart traders and every level, including Armageddon, is tradeable.
February 24th, 2009 at 8:07 pm
“P/E valuations tend to rise over time”
That’s one of the silly, self-confirming statistics (they’ve been falling in Japan for the last 20 years.) I guess that’s as true as home prices never falling…
A good argument can be made that investors will demand significant dividends in th efuture to compensate for equity volatility. Right now, companies are cutting dividends from an already paltry level of 2-3%. JPM has seen its share price 65%, and will now be paying 1%. wow.