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Robert Shiller's CAPE Measures Stock Market Valuation

Yale University economist Robert Shiller developed the cyclically adjusted price-to-earnings ratio, CAPE, as a valuation measure for the broad stock market. Using S&P earnings from January 1871 to the present, CAPE averages ten years of real earnings instead of the usual one year in the conventual price-to-earnings ratio. CAPE tends to smooth out periodic excesses in earnings.

The chart below shows CAPE values from January 1881 though the present. All data are from Robert Shiller and found at Quandl.

 

Click chart to enlarge it.


See Dueling Prisms for Valuing Stocks - a New York Times article for a discussion of the pros and cons of CAPE.


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