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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 [1]).

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.

Chart 1: Long term P/E and Interest Rates

More charts, and the paper’s conclusion, can be found here [1].

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2010/02/what-is-the-cyclically-adjusted-pe-ratio/

URLs in this post:

[1] here: http://www.ritholtz.com/blog../2010/02/removing-the-cape-from-cyclically-adjusted-price-to-earnings-ratio-cape/

[2] Image: http://www.ritholtz.com/blog/wp-content/uploads/2010/02/CAPE-.png

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