The Shiller P/E Is Misleading? In A Word, No!

Jul. 04, 2017 10:06 AM ET24 Comments
Jeff Opdyke profile picture
Jeff Opdyke


  • A writer I recently read claimed the Shiller P/E misleads because of the impact the Great Recession had on earnings.
  • That's a historically myopic and wrong assessment.
  • 1929 and 2000, the last times the Shiller P/E peaked at insane levels, had their own pre-peak weaknesses that impacted the ratio, and still the market plunged.
  • And the writer's claim that low-interest rates today deserve a higher multiple because of earnings growth is blind to the impact that rising rates historically have had on S&P valuations.

I read a fascinating article this week – fascinating in its historical myopia.

The writer tried to make the argument that the Shiller P/E ratio is, effectively, a lie. His claim was that the P/E’s current reading – now approaching a mind-numbingly excessive 30 – should be discounted because the Great Recession of a decade ago is warping the E in the P/E.

He has a point.

It’s just the wrong point, buttressed by a wrong analysis of the data – which I will get to in a just a moment.

To be perfectly clear: The Shiller P/E is screaming a warning to anyone who will listen. To be sure, it’s hard to hear that warning over the drone of incessant upbeat commentary everywhere … or, maybe, because too much of Wall Street ambles around these days with fingers in ears, refusing to listen to news it doesn’t want to acknowledge.

Alternative facts! Alternative facts!

That’s what the Street wants. Anything to keep the party amped up.

Personally, I’ve begun paring my holdings in the market, taking profits in certain positions and putting stop-loss orders in place on others … just in case the cheerleaders are wrong. And I continue to recommend every sane investor do the same. You don’t have to sell. If you think the market is going higher, great! Just make sure you have trailing stop losses in place to protect your downside in the event the cheerleaders aren’t right in their exuberance but, instead, are just hopped up on ecstasy.

Now, onto the debunking …

First, let’s set the stage for our play. The Shiller P/E has peaked at extreme levels on three occasions:

At just over 27 in 1929, as the Roaring 20s ended with the beginning of the Great Depression; at just under 44 in 2000, as

This article was written by

Jeff Opdyke profile picture
Globally minded analyst who has traveled to nearly 70 countries and serves as editor for International Living's The Savvy Retiree. I was staff writer for The Wall Street Journal's Money & Investing and Personal Journal sections for 17 years, and I've written several books on personal finance, overseas investing and the rise of the non-Western middle class. My focus is on U.S. and foreign stocks, as well as gold and collectibles, with a goal of helping retirees and those approaching retirement to see and understand trends, risks and opportunities ... all with the aim of pursing a richer life in retirement.

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.

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