Skip to main content

Sound Advice: March 12, 2026

Why You Should Watch the Shiller CAPE Index 

The Shiller CAPE Index is a long‑term valuation metric for stocks that compares today’s prices to 10 years of inflation‑adjusted earnings, and you should care because extreme readings have historically lined up with meaningfully different long‑run returns.

What the Shiller CAPE Index is

  • CAPE stands for Cyclically Adjusted Price‑to‑Earnings ratio, also called the Shiller P/E or P/E 10.
  • It is calculated as: current index level divided by the average of the last 10 years of earnings per share, with those earnings adjusted for inflation.
  • Robert Shiller popularized it to smooth out the business cycle noise that distorts the usual one‑year P/E.

What it is trying to tell you

  • By averaging a decade of real earnings, CAPE aims to say, “How expensive is this market relative to a normal level of earnings through a full cycle?”
  • Higher‑than‑average CAPE has historically been associated with lower‑than‑average real equity returns over the next 10–20 years, and vice versa.
  • Many practitioners invert it into a “CAPE yield” (1 ÷ CAPE) as a rough estimate of long‑run real return for planning purposes.

Why you should be concerned (but not panicked)

  • When CAPE is far above its long‑term average, it suggests the market is richly valued and forward 10‑year real returns are likely to be subdued compared with history.
  • That matters for retirement planning, withdrawal rates, liability matching, and for how much risk premium you can reasonably assume from equities going forward.
  • Very high CAPE readings have often preceded extended periods of disappointing returns, even if they did not immediately precede a crash.

What it does not do well

  • CAPE is not a timing tool; it cannot tell you when a bull market will end or when to go to cash. High CAPE levels can persist for many years.
  • Structural shifts (sector mix, margins, accounting, interest‑rate regimes) can make “fair value” drift over time, so you should treat CAPE as a blunt, regime‑level indicator, not a precise trigger.

How to use it in practice

  • Use CAPE to set expectations: lower return assumptions, more conservative withdrawal rates, and more robust stress tests when it is very high.
  • Consider diversification (non‑US equities, other asset classes) and factor in that U.S. large‑cap valuations may embed optimistic assumptions.
  • Avoid all‑in/all‑out decisions; instead, adjust around the edges—savings rate, tilt size, bond duration or rebalancing bands—based on what CAPE is implying about long‑term reward for risk.

The Shiller CAPE is flashing “expensive,” which implies lower long‑term expected returns from U.S. equities but not a precise crash call or timing signal.

What the CAPE is saying now

  • Recent readings for the S&P 500 Shiller CAPE are around the high‑30s to about 39, near levels last seen around the dot‑com bubble.
  • That’s more than double its long‑run historical median (roughly mid‑teens), meaning U.S. large‑caps are richly valued versus their own history.

What that actually warns

  • Historically, very high CAPE levels have been followed by below‑average real returns over subsequent 10–20 years, not necessarily immediate crashes.
  • A CAPE near 40 essentially says: “Don’t expect the next couple of decades to look like the last one from this starting valuation.”

What it does not tell you

  • It does not pinpoint tops, corrections or recessions; CAPE was elevated for years in the 1990s before the market finally broke.
  • It is also a blunt tool: accounting changes, sector mix (more tech, fewer old‑economy stocks), and low interest rates can keep it structurally higher than in earlier eras.

Practical implications for you

  • Use it as a risk‑management and planning input, not a trading trigger: Assume lower forward real returns in financial plans and stress tests.
  • Consider: modestly higher savings rates, more conservative withdrawal rates, and being careful about concentration in U.S. mega‑caps, rather than wholesale market timing.

Comments

Popular posts from this blog

Sound Advice: October 14, 2026

Why your adviser must be a fiduciary   You should insist that your financial adviser be a fiduciary because a fiduciary is legally obligated, when acting in a fiduciary capacity, to put your interests ahead of their own and manage conflicts of interest appropriately. Key reasons: Your interests come first. A fiduciary duty requires the adviser to act in your best interest rather than simply recommending something that is suitable or profitable for them. Fewer conflicts of interest. Some advisers can receive commissions, bonuses, or other compensation for recommending particular investments or insurance products. A fiduciary must address material conflicts rather than allowing them to drive the recommendation. Greater transparency. Fiduciary advisers generally have obligations concerning disclosure, fees, conflicts, and how they are compensated. That makes it easier for you to understand what you're actually paying. Better alignment over the long term. A good adviser sh...

Sound Advice: September 19, 2026

Is AI good news or bad news for investments? AI is potentially very good news for investors—but not automatically good news for every investment . The key distinction is between AI as an economic technology and AI stocks at today's prices . As of September 2026, there are compelling reasons for both optimism and caution: The bullish case: AI spending remains enormous. Gartner estimates global AI spending at $2.7 trillion in 2026 , up 49.5% year over year. If AI produces sustained productivity gains, corporate profits could expand well beyond the companies currently selling AI hardware. The valuation case: Investors have already priced in a lot of success. Valuations of major AI companies are elevated and expected long-term earnings growth is well above historical norms. The spending-risk case: The five largest hyperscalers are expected to spend more than $1 trillion on AI-related capital expendit...

Sound Advice: September 30, 2026

Now what? For many women, there comes a time when financial confusion reigns.   It may come after a spouse passes or a marriage goes off the rails.   It’s the same situation for women who never married. The questions are many.   The answers may be few.   Toward the top of the list of concerns is the issue of understanding.   Although there are always complex matters, it’s essential that all of the elements are clearly presented in a straightforward fashion.   There’s more.   Presentation is one thing, but comprehension is another. If there’s a question, it must be asked.   Clarity is the key.   Don’t just say I get it when you don’t.   And, it’s essential to grasp how each of the items fits in the overall situation. In the absence of understanding, no decisions will be made. Here are some of the most pressing questions? What’s the smart way to handle my investments? Where should I go for advice? A bank, stockbroker, attor...