click for ginormous charts
shiller cape
Source: JP Morgan


JP Morgan observes: “Shiller P/E shows the market to be overvalued, but not as extreme if you use the NIPA data.”

I’ve never used the NIPA data, so I have no real opinion on it.  The two charts look directionally similar, but different in terms of magnitude.

For those of you bulls in search of some valuation confirmation bias, NIPA is your best bet.




Washington Reset: Investing in the Wake of the Shutdown
Dr. David Kelly Chief Global Strategist
J.P. Morgan Funds October 30, 2013

Category: Data Analysis, Earnings, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

16 Responses to “Lagged P/E Ratios: Shiller Cape vs NIPA”

  1. rd says:

    It tells me that 50 years is too short a period to analyze these investing cycles. The first half of both charts is almost entirely below average while the second half is almost entirely above the average. If we view it is a repeating wave then we should expect the next 25 years to be below average – that sounds bullish.

    If we assume that resolving world-wide ZIRP and QE over the next decade or so could be the equivalent of Nixon going off the gold standard in 1971 and the oil embargo in the early 70s, then the wash-rinse-repeat wave could be a distinct possibility.

    The peak of the bull cycle after the Great Depression is the left side of the graphs. Why is a dollar of earnings worth 2X to 5X more in the past 15 years than it was then? Were people in the 60s just too pessimistic about the future or had too little faith in the Federal Reserve and Congress?

  2. 4whatitsworth says:

    I have found that when you really need an expert opinion find the expert. In this case Shiller. NIPA is a group likely looking for reasons to justify their pension projections. My view is that US stocks are now overvalued unless we get growth soon and that is only going to happen if we get a blue collar job recovery.

    The good news is that balance sheets are extraordinarily clean and liquidity is everywhere so I think that downside risk in minimized.

  3. Veneziano says:

    While stock may not look significantly overvalued by these metrics, I can’t help but feel that the secular bear will not be over until valuations drop well below the long-term average for a while.

  4. catclub says:

    1. Those two figures look essentially identical, just slightly different scale. In both, the 2003-2007 period _now_ looks like the market was overpriced.

    Other thoughts: The recent plot showing numbers of dollars on margin leaves out the denominator – relative to how big a stock market.

    I am trying to find reasons that this market does not look increasingly high relative to future prospects. Maybe I should read Andrew Tobias and his happy thoughts about the future.

  5. dorncg18 says:

    From John Hussman on NIPA:

    NIPA profits (from the National Income and Product Accounts, compiled by the Bureau of Economic Analysis) are a quarterly measure of economy-wide profits, restricted to current production, less associated expenses. As economists at the Department of Commerce and the BEA have noted (Mead, Moulton and Petrick, 2004), this measure of earnings deviates substantially from S&P 500 earnings. Expenses used in the calculation of NIPA profits exclude bad debts, resource depletion, disposition of assets and liabilities, capital losses, and any deductions relating to the treatment of employee stock options. It also includes an allowance for misreporting of corporate income. Many of these calculations are only available on an annual basis, with a considerable lag, and as a result, quarterly NIPA profit estimates and revisions make significant use of interpolation and extrapolation.

  6. Hammer of Thor says:

    If you were looking at this chart in 1990, would you have concluded that the market is over-valued? The historical averages would have been much lower at that time.

  7. supercorm says:


    This is not a point where secular bull markets usually starts. And if some people points to 2008 as the starting point, well, we where still in a bear market at that time. I’m looking at some consolidation before starting a trend, and 15x to 16x P/E isn’t the one … past, or future earnings.

    With optimistic earnings for 2014 at $120 (10% growth from here …), and with 15x forward P/E, the S&P should be at 1800 … and this is where we are already. I think it will be difficult to chase this market until year end for 1% upside, to buy a market that is already discounting next year’s earnings. I feel some should start protecting this year’s profits first.

    However, thanks to QE, corporations are forced to buy their own shares instead of doing M&A, plainly justified by the return of their investment. This ultimately drives up multiples. So then, ok, maybe we should expect some more upside, but still on multiple expansions as corporations as absolutely no incentives to use their cash for capex and hiring. This won’t help the top line, won’t help the bottom line, and, again, if any upside it will be on multiple expansion, leaving this market extremely vulnerable to the Fed’s QE. Catch 22 situation, highlighting a difficult exit …

  8. bigsteve says:

    I am just a working man who makes some investments in mutual funds in a 457 plan. But I am long term bullish because the third world is industrializing and the middle class world wide is growing rapidity. That will generate demand which certainly large cap who generally are multinational companies will be able to tap into but also smaller cap will get a piece of the action too. My understanding is that market value is usually forward looking at future earnings. The question is does the growth coming justify the current market price. That is partly a human judgement on what people are willing to pay for a piece of a company’s future earnings and the long term growth rate. Is the market getting ahead of itself? My gut reaction is most likely not.

  9. tshelton12 says:

    Does it really matter whether the markets are 18% or 24% overvalued? Markets can stretch longer than we think makes sense. Its the primary reason I believe you have to marry fundamental and technical analysis together. Fundamentals are saying expensive but technicals are saying the markets are pretty strong. Probably makes sense to be cautious and a little defensive here but stocks are about the only game in town (until they aren’t) so you have to have an adequate allocation to equities.

    Barry – FWIW, I was at JP Morgan for a good stretch and in the summer of 2008 D. Kelly was pounding the table that stocks are cheap and the housing crising would have a soft landing. Even into the fall he was in denial. My impression is that even if he believed stocks were over valued, he’d NEVER tell you to sell. He is a typical sell side economist and I personally have put him on the DO NOT LISTEN TO list. Again, FWIW

  10. Also see:

    Robert Shiller: Stocks high but not ‘alarming’ (MarketWatch)

  11. BenGraham says:

    NIPA says “all US corporations”. I’d just point out that not all corporations are publicly traded. That alone might account for the lower valuation on the NIPA data.

    Secondly, why did JPM truncate the data at 40 years? Sure, 40 years is a long time, but why not use 50? or back to 1900 even? It’s not like the data isn’t there.

    Finally, I’d just note that in all past secular cycles, valuations broke significantly below average for significant periods of time. 2009Q1 does not meet this pattern. Either mean reversion is dead or the market is significantly overvalued.

  12. Frilton Miedman says:

    Mindful of the “E” in P/E, the slightest improvement to median net worth, wages or if something happens to stimulate/coerce the unprecedented $2.3 Trillion in excess reserves into lending instead of use for prop trading collateral….

  13. odnalro zeraus says:

    Barry, what do you think?
    Can we get a response from Shiller?

  14. sensibleinvestor says:

    This graph is telling me that you want to own stocks when Shiller P/E is going up, which was the case from 82-99,03-07,09-?

  15. TKREF says:

    Apples & oranges. SP500 valuation is what’s relevant to SP500 index. NIPA valuation would be relevant to a NIPA index, but there is no such thing, because NIPA is based on all U.S. corporations — including privately held. NIPA valuations and SP500 valuations follow same trends, but to assess historical relative valuation, use SP500 valuation for SP500 index. (Duh.)

    For more, see

    Also, not that much of a difference between 18% overvalued and 24% overvalued. The question is where valuations are headed from here.