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What is the Cyclically Adjusted S&P500 P/E Ratio ?
Posted By Barry Ritholtz On February 26, 2010 @ 2:23 pm In Earnings,Valuation | Comments Disabled
Warning: Wonkiness ahead:
Chris Turner took a look at Yale’s Bob Shiller “cyclically adjusted price to earnings ratio” (CAPE). Shiller uses an inflation adjusted S&P 500 Index (using simple monthly CPI data). The professor then divides that a 10 year average of trailing earnings (similarly CPI adjusted) earnings.
Chris wanted to know what happens if we pull the Cycle out of the CAPE? (Chris’ paper is here ).
Short answer: You end up with a long term chart of inflation adjusted SPX valuation that implies the market, by Shiller’s metrics, has been overvalued (i.e, “Not Cheap”) for a long time.
More charts, and the paper’s conclusion, can be found here .
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