Cyclically adjusted price-to-earnings ratio
What is the cyclically adjusted price-to-earnings ratio?
It's a valuation measure usually applied to the US S&P 500 equity market, defined as price divided by the average of 10 years' earnings, adjusted for inflation. It's mainly used to assess likely future returns from equities over timescales of 10-20 years.
Where have you heard about the cyclically adjusted price-to-earnings ratio?
Also known as the P/E 10 Ratio, it was popularised by Yale University professor Robert Shiller, winner of the Nobel Prize for Economic Sciences in 2013. It attracted lots of attention when Shiller predicted that the late 1990s stock market rally would turn out to be a bubble.
What you need to know about the cyclically adjusted price-to-earnings ratio.
The P/E 10 Ratio has varied significantly over time, from a low of 4.78 in December 1920 to a high of 44.20 in December 1999.
Originally derived for the US equity market, the CAPE has since been calculated for 15 other markets. The ratio is sometimes criticised for lack of accuracy in signalling market tops or bottoms. One proposed reason for this time variation is that it doesn't take into account prevailing risk free interest rates.