Entering text into the input field will update the search result below

Why The Shiller CAPE Ratio Is Misleading Right Now

Geoffrey Caveney profile picture
Geoffrey Caveney


  • Robert Shiller's Cyclically Adjusted Price to Earnings (CAPE) ratio is now around the level of 1929, and it was only higher in the late 90s dot-com bubble.
  • Many commentators have pointed to this indicator recently as a danger sign for the stock market.
  • However, this is misleading right now because the CAPE ratio's 10-year back period begins with the Great Recession in 2007.
  • So the 10-year earnings are abnormally low, due to the effect of 2007-2009 on the 10-year average.
  • As the recession years "roll off" the 10-year back period, the 10-year average earnings will increase, and stock prices can rise without making the Shiller CAPE ratio rise excessively.

Last week many commentators were talking about Robert Shiller's Cyclically Adjusted Price to Earnings (CAPE) ratio: It is now at 29.66, around its peak level in 1929 before the Black Tuesday crash. The ratio was only ever higher in the late 90s dot-com bubble.

(Source: multpl.com)

Therefore, many people right now see this indicator as a big danger sign for the stock market (SPDR S&P 500 ETF (NYSEARCA:SPY), PowerShares QQQ Trust (QQQ)).

Of course, it is understandable to be concerned about valuations and earnings when buying stocks. But we should also look at all the factors and variables that go into the Shiller CAPE ratio, as well as other macroeconomic factors that affect stock prices today, before we jump to conclusions.

Low Interest Rates and Central Bank Actions

A couple important factors that justify a higher CAPE ratio have been frequently cited in recent years. First of all, extremely low interest rates: When it is so difficult to earn any significant return on one's capital in the money market or the bond market (iShares 20+ Year Treasury Bond ETF (TLT)), investors will tolerate lower expected returns on stocks as an alternative -- because they're still better than bonds -- driving stock prices and P/E ratios higher. To put the 100+ year Shiller CAPE ratio chart in perspective, one should also look at the 100+ year history of the 10-year U.S. Treasury bond (iShares 7-10 Year Treasury Bond ETF (IEF)) yield:

In recent years, we have seen this dynamic have a very specific material effect on the S&P 500 index in particular: During periods when higher-risk growth sectors have sold off, many investors have shifted funds into lower-risk stock sectors such as utilities and consumer staples, rather than shift those funds into low-yielding bonds. Since utilities and consumer staples are still

This article was written by

Geoffrey Caveney profile picture
Investor, researcher, independent thinker, human being Antifragile

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am long various tech stocks and other stocks.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.