Brutal take-down of CAPE:
The only problem is they’ve been getting expensive for awhile now. “According to CAPE,” Crossing Wall Street’s Eddy Elfenbein told me, “stocks have been valued above average for most of the last 25 years.” Part of that is accounting standards are different than they used to be, so valuations are too—they’re higher. Another part is that interest rates having been falling the last three decades, and, all else equal, lower rates should mean higher stock valuations. And the last part is that CAPE overweights what happened before to what’s happening now. Think about it like this. Today’s 27.2 CAPE ratio is so high, in part, because earnings were so bad during the financial crisis. But it’s a little funny to say that a historically crummy economy seven years ago means stocks are overvalued now.
HT: Abnormal Returns
