VALUATION GUIDE
What is the Shiller CAPE ratio?
The Shiller CAPE asks a deliberately patient question: how much are investors paying for a decade of inflation-adjusted corporate earnings?
Why use ten years of earnings?
One year of profits can be distorted by a recession, a boom or an unusual shock. Averaging ten inflation-adjusted years smooths the cycle and makes comparisons across market eras more useful.
What counts as expensive?
There is no magic cutoff, but readings above 30 have historically belonged to a rare and expensive part of the distribution. The dot-com peak was much higher; other costly markets corrected without matching it.
What CAPE cannot tell you
CAPE is poor at timing. An expensive market can become more expensive and remain there for years. Use it as a pressure gauge, then look to leverage, positioning, credit and sentiment for confirmation.