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...)

Related or Semi-related Video

Finance: What is Earnings Quality?50 Views

00:00

Finance allah shmoop What is earnings quality Well it's just

00:07

math right Whatever Dot com just produced a dollar thirty

00:10

two in earnings One hundred thirty two cents of wall

00:13

street Love and profit How can there be a quality

00:16

to that number The number is a number right Well

00:19

yes but rather there are different qualities of earnings What

00:23

if we told you that one hundred percent of whatever

00:25

dot coms earnings came from Adsit sold tto forty thousand

00:29

different buyers because its website was just that popular All

00:33

of the growth came intrinsically meaning that users just loved

00:37

using the site and nothing meaningful changed on their balance

00:40

sheet or wall street Fancy engineers doing creative clever things

00:44

with the selling of money Other than that the cash

00:47

account went up because dead profits and they kept him

00:50

okay Those air very high quality earnings Really sure about

00:54

that C we threw a curveball in there We do

00:57

that all the time All right Well what if we

00:58

told you that seventy percent of their ad sales came

01:01

from a subsidiary in china and were all collected in

01:05

our m b the chinese currency and that in this

01:08

quarter well that the chinese currency appreciated thirty eight percent

01:12

relative to the dollar Well essentially all of their big

01:16

growth The big growth that we thought was such high

01:18

quality earnings came because the chinese currency did well not

01:22

because their business did all that well so wait Had

01:26

the chinese currency just been flat the company wouldn't have

01:29

earned anything close to a dollar thirty to seventy percent

01:33

of the sales and almost forty percent of currency gain

01:37

there Well it means that the company happened to have

01:40

a lot of sails in a country with a fast

01:42

appreciating currency It wasn't necessarily a direct reflection that the

01:46

company was doing so well and had such high quality

01:49

earnings Yeah it's great that they were in a hot

01:51

market and highly appreciating currency but if the currency hadn't

01:54

gone up so much relative to the u s dollar

01:56

in which they report their earnings toe wall street while

01:59

the real urn things end of the company would have

02:01

been more like a dollar maybe less so that it

02:04

be low quality earnings What about high quality earnings Well

02:09

really simply you said you'd sell three hundred tractors this

02:13

quarter the street thought you'd sell three hundred ten You

02:16

actually sold three hundred twenty you said margins would be

02:19

twenty percent The street thought they'd be twenty two percent

02:22

and they actually were twenty five percent You said you

02:25

generate twenty million dollars in cash the street thought you

02:28

generate twenty two and you actually did generate twenty five

02:32

million dollars in cash High quality financial results Simple You

02:36

just did your core business Selling tractors well Quality earnings 00:02:41.233 --> [endTime] quality tractors

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