The Shiller CAPE Isn’t the Only Metric Showing a Severely Overvalued Market….

In case you missed it – Jeremy Siegel of “Stocks for the Long Run” fame wrote a piece in the FT on Monday blasting Robert Shiller’s famous CAPE valuation metric.   This isn’t the first time someone has torn into the metric.  For a more thorough view I would highly recommend seeing this post in which Merrill Lynch said the metric was flawed and then this follow-up by JJ Abodeely.

Anyhow, I won’t go into the CAPE and my personal views too much since I don’t really use any valuation metrics in my macro analysis (I find them largely unreliable for practical strategy application), but I did want to point out something that John Hussman highlights – if the Shiller CAPE is wrong then several other metrics are probably also wrong…because they’re telling the exact same story!

First off, here’s the Q Ratio which measures the market value of a company divided by the replacement value of firm assets (via Smithers):



Warren Buffett’s favorite valuation metric, GNP to total market cap is telling a similar story:



And revenues relative to U.S. equity prices tells a similar story:



Of course, these metrics aren’t all calculated the same way, but they tend to correlate very closely over time.  When one is overvalued they all tend to be overvalued.  The CAPE Shiller ratio might be misleading, but one thing that’s certain is that the high market values it currently shows are confirmed by several other indicators.   The bigger question is whether any of these metrics are actually all that useful for practical purpose.  I have my doubts.  As for “stocks for the long-run”, well, let’s just say I don’t have time to debunk that one here.


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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • SS

    Siegel is the ultimate permabull broken clock. He’s never seen a stock market he didn’t fall in love with.

  • Stephen

    “Useful”. Yes I think they are, but not if you are looking at it searching for a precision instrument for timing a major market turn. The “useful” aspect is to simply moderate ,or adjust your risk exposure to equity. That alone is worth the bucks over time not taking the significant periodic drawdowns that follow overvalued markets.
    By the way anyone ever find a “precision” instrument please let me know because I don’t know of any except with hindsight built in.

  • Stephen

    By the way “Siegel” in his criticism ,in my view, simply advocates data mining by trying to excuse and omit data he doesn’t think fit’s.

  • Rafael

    A few years ago I studied the CAPE.

    Looked at the real average yearly price change in SP 500.

    CAPE to 1 year average price change = -.15182
    to 5 year average yearly price changes = -.3024
    to 10 year average yearly price changes = -.41611
    to 15 year average yearly price changes = -.627
    to 20 year average yearly price changes = -.77407

    Then I compared the end price determined by the time frame to the present price at the time

    CAPE to change between present price to price 5 year out = -.29743
    to present price to 10 years out = -.39746
    to present price to 15 years out = -.5397
    to present price to 20 years out = -.60603

    Today’s Cape is between 23 – 24 which suggests that longer term terms yearly average and total aggregate returns could be much lower than average.

    However, between now and ten years, the results vary much more greatly.

    Perhaps it would be wise to expect price swings in both directions, even if the overall price slopes marginally upwards (or downwards ehh!).

  • Anonymous

    There are two data points that matter, what the Fed is going to do and what Government (Federal/State & Local) is going to do. All other metrics and economic analysis are useless. If money is flowing into a market, that market will rise. Money flowing out and that market will fall. If you do not agree, ask yourself what would happen if the Fed ended all programs……. The Fed rules the roost. There is a reason they are plowing 85 billion into the markets every month.

    As many wealthy Americans know, most money is made via the US Government in one form or another. Either through contracts (construction), exploiting policy (Healthcare) or some other tax payer program (Wall Street…..). What Washington does matters. The real inside information is gained through politics and following the real money flow by influencing policy and what Washington does. If you snuggle up to your local politicians you will do better financially either by building your business or by following policy for investment returns. Why do you think congress is legally allowed to trade on insider information?

    So, do they taper? Will rates rise just a little bit higher? How much of a rise in rates will wipe out any return? How high do you need rates to rise before you pull your money out of the stock market? What are the key historical takeaways from the 1987 crash? How will the Fed manipulate the markets? What new regulation will Washington pass or change? What implications will this have on the market? What is being rezoned in your local market area? Did your state approve an expansion to the local hospital? Do you own real estate adjacent to the hospital? All other data points are rear view mirror.

  • Rich

    I don’t see much reason to believe these metrics are mean reverting. Without understanding how the underlying process works you need to do statistical calculations of things like the Hurst exponent. There isn’t nearly enough data to do these calculations; I’d guess they mean revert for a while, then trend for a while, just like the stock market. Anyone want to bet which phase we’re in? I wouldn’t.

    Shiller and Siegel often vacation together; they will probably have an interesting time this year.

  • CJ

    Interest rates, mate (specifically the cash rate).

    And the yield curve.

    Not precise to the day but probably as good as you are going to get.

  • perpetual_neophyte

    I’m no statistician nor a chartist, but if you squint, it sure seems like the “mean” has slowly trending higher over time. I’m not sure it’d be appropriate, but if you drew a linear regression through at least a couple of those charts, I think it’d have a positive slope.

  • JC

    I wonder if the market value to GNP should have an upward sloping trend line as foreign operations become a bigger percentage of S&P 500 total earnings?

    And I wonder if the same thing applies to the Q-ratio as the U.S. becomes a more service oriented economy, which traditionally is asset light in nature?

    An upward sloping trend line on both those charts looks to put the market at fair valuation.

    Revenues have certainly been weaker than earnings and is something that needs to be monitored.

  • jt26

    Has anyone ever seen a historic chart for [enterprise value]/GDP? Enterprise value includes debt so it has two components: management risk taking (debt) and investor risk taking (market cap). It would be interesting to compare.

  • RD

    S&P 500 dividend yield is another one that indicates similar over-valuation. It is still a couple of percentage points below the normal long-term yield. It is very difficult tor CFOs to fudge cash dividends to stockholders.

    Also, the rising price to revenue ratio indicates the rising price to GDP ratio is not just due to increased overseas contribution to revenues and profits of multi-national firms.

  • RD

    The rising price to revenue ratio means that the rising price to GDP ratio is not just foreign sales.

    That is why multiple metrics of different things are useful.

  • Andrea Malagoli

    Jeremy Siegel is a broken record. He needs to defend is book at all costs, or else admit defeat.
    He is another piece of deadwood academics.

    CAPE may have flaws, but the relationship between CAPE and LONG term equity returns is undeniable, especially in the USA. By LONG term I mean 10+ years, so I agree with Cullen that it is not too useful for strategy work.

    Of course, the likes of Merrill tries to kill anything that may create doubts about the need for people to pay fees into their mutual funds forever. When you sell billions worth of financial products, the last thing you’ll ever recommend is to park your money in cash, if only for a brief period of time.

    The industry has deep pockets to create these propaganda, and the passive investing crowd does not hesitate to flex its muscles.

    There is more than CAPE to debunk Jeremy Siegel and its minions. See e.g. here:

    CAPE or not CAPE, the real truth is that returns on equities over long time horizons are UNRELIABLE. This point is little understood to pension funds that think they’ll get 8% p.a. if they only waited long enough.

    The myth of “Investing for the Long Term” is hard to die.

  • bankster

    Breaking News:

    EBU stops its support to the Hellenic Public Broadcaster: Another victory for the neoliberal dictatorship

  • RD

    Did you look at total returns? High valuations usually mean low dividend yields and vice versa, so much of the difference in total returns is not due to price changes, but in the total return of price and reinvested dividends.

    It was dividends to allow the total returns of the stock market to recover a total portfolio value much earlier than a new high of the index price in the Great Depression.

    A substantial percentage fo the total return of the stock market over the past century (those oft quoted 8% to 10% numbers) was due to reinvested dividends that have averaged about 4% per year, substantially higher than today’s yield.

  • Old Dog

    If anyone has a truly accurate market predicting model they are sitting on a yacht someplace keeping very, very quiet.

    The folks sponsoring most financial sites love these discussions as they lead to increased levels of trading.

    Churn baby, churn!

  • zmt63

    I haven’t, but that could be interesting in a way one might not expect, since Fortune 500 companies are sitting on such ginormous amounts of cash.