Shiller’s cyclically adjusted price-earnings ratio
click for ginormous chart
Source: Bloomberg



Robert J. Shiller, a co-winner of this year’s Nobel Prize in Economic Sciences says US stocks are expensive. They are the most expensive relative to earnings they have been in more than five years — since the lows follwoing the great collapse of 2007-09.

Shiller’s CAPE ratio — the cyclically adjusted price-earnings ratio — compares the Standard & Poor’s 500 Index with companies’ average profits over the prior decade. The ratio ended last month at 23.7, the highest since January 2008, according to data available from his website.

Bloomberg notes that “the September ratio was lower than a peak of 27.5 in May 2007 — and even further below a record of 44.2, set in December 1999.”  Date for Shiller’s price-earnings figures go all the way back to 1881 (above chart 1900 – present).

Shiller made several other comments on equities:

“The stock market is rather highly priced. I worry that it might correct down.”

“I don’t think one should view it with alarm.”

“One could well — and probably should, in a diversified portfolio — invest in stocks.”

A far cry from his prior warnings of dot com stocks in 1999 and housing in 2006.

The CAPE ratio was developed by Shiller and Harvard University professor, John Y. Campbell.



Chart of the Day: Shiller Views U.S. Stocks as ‘Highly Priced’:
David Wilson
Bloomberg  2013-10-15

Category: Technical Analysis, Valuation

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12 Responses to “Shiller: U.S. Stocks Are ‘Highly Priced’”

  1. spencer says:

    From WWII to around 2000 the long growth rate of S&P 500 EPS was about 7%.

    During this time I looked at the PE as an expression of the present value of a perpetual stream of 7% EPS growth.

    Interestingly, over this period the long run trend growth rate of nominal GDP was also 7%.

    But my PE equation, based on a regression of the 1960-1990 period, now says that at current interest rates the PE on trailing operating earning should be about 19.

    On this basis the market looks cheap.

    But in a low growth environment is the market still discounting a 7% long term growth rate for eps.

    Maybe, the market in its wisdom is already assuming that the long term growth rate for eps is maybe something like 4%– what nominal GDP has been in this recovery.

    • Angryman1 says:

      Debateable whether this is a “low growth” environment or not. I think the historic public sector contraction has skewed the numbers so to speak. The pros are confident(outside politician weakness) and it is showing up in the stock market.

  2. freethinker52 says:

    the difference now is that there is no easy alternative to stocks.

  3. Eric Original says:

    Thought I’d share an email exchange with a friend. I had commented this morning about the new highs in the S&P and my good friend had replied “don’t get cocky” ( I had made no secret of the fact that I’ve been long all year). I made my reply in my best Ritholtzian Style:

    “Ah, but I beg to differ my friend! I don’t see it as cockiness at all, in fact quite the opposite. I see it as total capitulation and humility. Tossing my ego out the window and admitting that I can’t figure it out. People all over the financial web devour info all day long, trying to figure it out, trying to find the golden goose. They are wasting their time, because it can’t be done.

    The problem is that it is the fundamentals that are the illusion. All fundamentals, politics, economic theory. All Illusion. There are no facts, only opinions, and opinions are shaped by pre-existing biases. Those who supposedly objectively analyze the data simply cherry pick and manipulate the data to support their pre-existing opinion. Some of this is consciously deliberate. Much of it is simply human nature. It is how we are wired. We don’t even realize we are doing it. We go around every day confirming our own biases.

    The only thing out there with a shred of reality to it is price. There’s plenty of opinion and emotion in there as well, but price is what determines my gain or loss. That’s real. Whether money is pouring into something or out of something is revealed in price. It’s a fact.

    In our social lives, how we relate to people, how we vote, opinions are fine. Opinions are necessary. But in how we invest our money, no. Opinions are a drag on performance. Toss them all out the window. Focus on price, and stay with the trend. If the current trends change, I’ll change. And I won’t stubbornly cling to an opinion based paradigm that has demonstrably changed. I’ve done that a lot in my life and it always costs me money. No more.

    Back to the kitchen. Lasagna noodles are almost done, and then the fun begins.”

    • zenlang says:

      @Eric Wow! A great philosophical response i have seen in a long time.

      • Eric Original says:

        thanks zenlang. You know, I think I could have boiled that whole thing down into those old standards, “The Trend Is Your Friend” or “Don’t Fight The Tape”. I don’t know where they originated, but I learned them from the late, great, Marty Zweig. And then had to relearn them. And relearn them…

        I think maybe I have it now, but I give kudos to Barry for teaching us all a new framework for realizing why those old chestnuts were genius in the first place.

    • eastman says:

      Eric, You can take over when Barry is on leave or busy with his RIA!

    • Clem Stone says:

      I don’t necessarily disagree but knowing when the trend has changed can be problematic.

  4. willid3 says:

    maybe we need a new metric. SPS (or sales per share). since today we have seen EPS bloom, but sales fall. which is better for the long term existence of a company? consider Kodak, they had cameras, but failed to keep up because they didnt get into electronic versions. and they went bankrupt because of that. but if just cut costs to match sales, you could end up loosing the company when sales keep falling. or consider companies in the server market. seems that all the name brand manufacturers have falling sales. because of the non name commodity priced servers are taking share from all of them.

  5. [...] Shiller: U.S. stocks are ‘Highly Priced’ (TBP) [...]

  6. SteveC says:

    Bulls: “Nasdaq 5000! At this pace, we’ll be there in a few months! Have you flipped your house yet? Mine’s up 40% in the last 6 months! To the moon!” Sound silly? It should. Don’t confuse luck with skill. This party will end the way they all do when markets go parabolic. NAS is currently parabolic.