![]() ![]() ![]() ![]() So far, the indicators just keep on rising. That experience encouraged prognosticators to use CAPE and Q as indicators of stock market peaks. That burst of exuberance was followed by an inflation-adjusted 48 percent decline in the S&P 500, according to Macrotrends, a compiler of investment data. The only time they were higher was right before the bubble of the late 1990s ended. Still, today’s ratios are 20 to 40 percent above the peak of the bull market of the 1960s. A lot has changed in the economy and the stock market in the past 119 years. Some caution is needed, since Smithers simply defines fair value as the post-1900 average. Their latest estimates suggest massive overvaluation – the CAPE, which covers the whole market, is 108 percent above the historical average, and the Q ratio, which is not valid for financial companies, is 77 percent higher. Investors can thank the British economist Andrew Smithers and his successors, who have developed more than a century of reasonably consistent measures for the U.S. It attempts to measure the relationship between a company’s stock market capitalisation and the cost of replacing its assets.īoth CAPE and Tobin’s Q can be calculated for the whole market, although a lot of work is required to keep the numbers comparable. The second measure is Tobin’s Q, developed by another American laureate, James Tobin. Popularised by Nobel Prize-winning economist Robert Shiller, the CAPE compares the current price of a stock to its average annual inflation-adjusted earnings over the last decade. The first is the Cyclically Adjusted Price-to-Earnings ratio. There are two plausible measures for long-term comparisons. A trader watches screens at his desk at the Frankfurt stock exchange June 5, 2012. ![]()
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