That time people freaked out about the CAPE ratio 10 years ago 😱
CAPE was high in 2015, and yet it was followed by double-digit annual returns in the stock market 📈
The stock market is trading at record highs with the S&P 500 hovering above 6,300.
This follows a good couple of years for the market. And as Ben Carlson notes, it’s been a good couple of decades, too.
Whenever there’s talk about decades in the stock market, my brain automatically goes to the cyclically adjusted price-earnings (CAPE) ratio, the metric popularized by Nobel Prize-winning economist Robert Shiller.1
CAPE is calculated by taking the price of the S&P 500 and dividing it by the average of the past 10 years’ worth of earnings. When CAPE is above its long-term average, the stock market is considered expensive, which suggests market returns are likely to be low in the years to come.
CAPE has been elevated for some time.
