12/01/2010
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Yale Professor Robert Shiller has devised and maintained his Cyclically Adjusted Price Earning ratio (CAPE10) as an alternative to the P/E ratio to value the U.S. stock market.
CAPE10 is defined as the ratio of price to the average of the last 10-year trailing S&P 500 annual earnings. In his book Irrational Exuberance, Shiller popularized this ratio as a long term stock market valuation metric.
For example, on Friday, Oct. 23, 2009, the current CAPE10 was 24.08 while the long term average CAPE10 (since year 1881) was 16.34. This implies that the U.S. stock market was 35% overvalued on that day. By this measure, the U.S. stock market is 37% overvalued.On Nov. 26, 2010, the ratio of Real Price to the average of last 10 year Real Earnings (CAPE10)(22.47) to its long term average (16.38) is 1.37.
Below is a historical chart of the CAPE Index.
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This would suggest a defensive portfolio with a significant portion of the assets in fixed income or cash.
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