No. of Recommendations: 3
Those with time and inclination might be able to tell us mortals what this all means.
I'm guessing the upshot is, yes, the US market is overvalued. Expect lower returns, maybe even look out below, timing uncertain.
The CAPE That Cried Wolf: Has the Standard Market-Valuation Metric Broken Down?
larryswedroe.substack.com - The cape that cried wolf has theFor decades, the Cyclically Adjusted Price-Earnings (CAPE) ratio—pioneered by Nobel laureate Robert Shiller—has been the gold standard for evaluating equity market valuations. The logic behind it is elegant and intuitive: by smoothing out earnings over a rolling 10-year period, it filters out the noise of the business cycle to tell us whether stocks are cheap or expensive relative to history.
When CAPE is high, future long-term returns are expected to be low; when it’s low, future returns should be robust.
But since the early 1990s, and particularly after the Global Financial Crisis, CAPE has increasingly looked like the metric that cried wolf. It persistently signaled extreme overvaluation, warning investors to stay away while equity prices stubbornly marched higher.
Did market physics break, or was the metric itself flawed?The paper:
The CAPE that Cried Wolf
SSRN: Research paperCAPE-H reestablishes predictability in excess returns, consistent with valuation-based mean reversion, by restoring the link between valuations and subsequent price appreciation. 