CAPE Ratio

Here's a good ratio for a cape, such as Cape May, NJ: The more people going there, the greater the misery when you get stuck in traffic.

But the CAPE ratio actually stands for Cyclically Adjusted Price/Earnings. We assume that clears that up. Nothing more to say really...

Okay, we'll help you out. Stock market analysts use the CAPE ratio to measure S&P 500 companies' earnings per share, for example, over a 7-10 year period. It is believed that this will help smooth out any big fluctuations that can happen in short-term bursts. The goal is to look at things over a relatively long time. Like a full economic cycle.

Doing this can help determine if the market is overvalued or undervalued. Since recessions cause most companies' earnings to go down, the inventor of the CAPE ratio, Robert Shiller, believes one should take an average of earnings over 7-10 years. In 1997, Shiller said the CAPE ratio was at a record high that year thanks to high stock prices and lower earnings, and he predicted the value of the stock market would be 40% lower in 10 years. Sure enough, the stock market plunged 60% in 2008 at the start of the Great Recession.

The CAPE ratio is also very high at the moment in 2018, with stock prices up and a CAPE ratio of 33.78. The long-term average is 16.8, so who knows when the next market correction will occur? (Shiller, maybe? If you know him, can you give him our number...)