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Sound Advice: August 8, 2025

An Important Market Signal is Flashing RED

Robert Shiller is a prominent American economist, academic, and author, best known for his work on financial markets, behavioral economics, and housing markets.  He is Sterling Professor of Economics at Yale University.  In 2013, he was awarded (along with Eugene Fama and Lars Peter Hansen) the Nobel Memorial Prize in Economic Sciences for empirical analysis of asset prices.

Robert Shiller’s CAPE index is a valuation measure for the stock market that compares current stock prices to average inflation-adjusted earnings over the past 10 years.  It’s designed to smooth out short-term earnings fluctuations and better reflect long-term value.   In 1999-2000, the CAPE index soared to over 44, for above its long term average.

The Shiller CAPE (Cyclically Adjusted Price-to-Earnings) index is currently at historically elevated levels—recent readings hover between 36.8 and 38.6, compared to a long-term median value of about 16 and a typical range of 27 to 34.  These levels have been exceeded only during the late 1920s before the Great Depression and during the late 1990s dot-com bubble.

Key points:

  • Current CAPE Value: Around 37–38, placing it near historical peaks and nearly double its long-term average.
  • Implication: Historically, a high CAPE ratio tends to signal lower long-term average future returns and increased risk of a correction or bear market.  The negative correlation between high CAPE and future 10- or 20-year equity returns is well-documented.
  • Market Timing Limitations: Although elevated CAPE reliably predicts lower long-term returns, it does not provide a precise signal for immediate or short-term market collapses.  The CAPE has often stayed high for extended periods, and markets can remain overvalued longer than expected.  Major collapses have historically been preceded by high CAPE, but not every period of high CAPE is followed by a crash.
  • Recent Analysis: Most current analysts and researchers emphasize that although the CAPE is flashing a warning about valuations and lower prospective returns, it is not a reliable market-timing or imminent crash indicator.  Even so, it suggests caution and a lower margin of safety for equity investors.

Bottom line:  The Shiller CAPE index is signaling that U.S. equities are richly valued and that investors should expect lower long-term returns.  Although it is not signaling a guaranteed market collapse, but one must be aware of  elevated risk and a need for caution.

N. Russell Wayne

Weston, CT  06883

203-895-8877

www.soundasset.blogspot.com 

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