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Robert Shiller’s revered stock market valuation ratio, the so-called CAPE, is crappy at predicting 12-month returns. Here’s proof.
The above comments, and those below, have been edited by munKNEE.com (Your Key to Making Money!) for the sake of clarity [] and brevity (…) to provide a fast and easy read and have been excerpted from an article* by Sam Ro (BusinessInsider.com) originally entitled Robert Shiller’s revered stock market valuation ratio is crappy at predicting 12-month returns and can be read in its unabridged format HERE.
Robert Shiller’s cyclically-adjusted price-earnings (CAPE) ratio is calculated by taking the S&P 500 and dividing it by the average of ten years worth of earnings. If the ratio is above the long-term average of around 16x, the stock market is considered expensive. CAPE is currently at 26x, a level last seen during the dotcom bubble and, before that, the crash of 1929 so, therefore, we must be doomed, right? Not necessarily.
According to research by Citi’s Tobias Levkovich, and as illustrated in the chart below, CAPE has no ability to predict stock price outcomes a year later.
Citi Research
Conclusion
A PE ratio is just not a good tool for predicting 12-month returns. Having said, it’s probably best not to play the game of predicting 12-month returns.
*http://www.businessinsider.com/sp-500-cape-vs-sp-500-12-mth-forward-returns-2015-2
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