Robert J. Shiller

And when he talks on certain topics, I always want to listen.

And in this instance, he's talking about the Shiller cyclically adjusted P-E ratio.

And before we get into his comments about that, I just want to define what this metric is for everybody.

So the Shiller cyclically adjusted P-E ratio, often referred to as the CAPE ratio because it's a mouthful, is a valuation measure for the market that divides the current price of an index like the S&P 500 by the average of its inflation-adjusted earnings over the past 10 years.

Using a 10-year average smooths out the ups and downs of the business cycle so a single boom or recession doesn't distort the picture.

A higher CAPE suggests from a lot of people that stocks are expensive relative to long-term earnings, and a low CAPE suggests that they're cheaper.

Okay.

So we now know that, according to the Shiller report, Price-earnings ratio that we've got a pretty much historic high in the stock market.

We've got inflation index bonds yielding, long-term bonds yielding three, the highest yield they've been at, or the lowest price, another way of putting it for probably since the, apart from maybe the a few weeks after they were first issued and then they weren't issued again continuously for pretty much the last, I think, 25, 30 years or so.

So 3.21, you can get that for sure unless Uncle Sam defaults.

And I think this is really important.

People talk about, you know, well, this is different.

The public equities price earnings multiples outside of the cyclically adjusted price earnings Shiller metric aren't particularly high.

So it's not going to be equities this crash.

Okay.

There's a thing called the Shiller cap ratio, which is basically the price earnings ratio.

Are you talking about tech stocks or stocks in general?

Stocks in general.

Right.

So it's called the Shiller cap index.

And basically what it does is it goes through... 100 years data, and it says, at what point do stocks become so self-evidently expensive that a crash is almost guaranteed, right? Almost on the cards, right? And the S&P 500, he goes back since 1881, which is a huge amount of data.

And right now, the Shiller Index for the S&P 500 is at 41%.

How can we tell if valuations are high? Well, there's no perfect method, but using the CAPE measure does allow us to roughly gauge the priciness of the market compared to its historical average.

The CAPE ratio, also known as Shiller's PE, is an inflation and business cycle adjusted PE ratio that compares the S&P 500's price level to the underlying earnings of its stocks for the past 10 years.

A higher CAPE measure means that investors are paying more per dollar profit.

and it's not looking so good.

But we'll have to wait and see what the metric looks like once we lap 2009's data.

Perhaps we'll see the CAPE ratio fall more in line with historical data points, or perhaps it will only confirm that markets are currently expensive.

Regardless, as the creator of the CAPE ratio, Robert Shiller, said himself back in 2017, there is no clear message from the metric.

So while it's important to acknowledge the risks out there and prepare your finances accordingly, there's no way to know for sure whether a bear market is coming today, tomorrow, or three years from now.