CAPE of no hope

“Forward P/E ratios” are meaningless. Wild guesses, for the most part. Current P/E ratios (trailing 12 months) are overrated. Enter Professor Shiller of Yale University to clear out the fog of P/E ratios for the broad market. Shiller developed the idea of CAPE (Cyclically Adjusted P/E Ratio), which intuitively makes sense.

Because corporate profit margins are volatile, Shiller’s solution is to use a “normalized” P/E, which adjusts earnings to the average profit margin for the S&P over the last 10 year period.

Applying this brilliant valuation metric, the S&P is still about 30% overvalued. Read more about it here:
http://www.businessinsider.com/blackboard/cyclically-adjusted-pe-ratio-cape
http://www.businessinsider.com/the-crash-in-context-stocks-are-still-30-overvalued-2011-8

Advertisements

Tags: , ,

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: