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Equity Market Valuations: A Review of CAPE Ratios

August 2015
There is no perfect measure for assessing the value of public equity markets, but the price-to-earnings ratio is both logical and certainly one of the most popular metrics. Rocaton prefers to use cyclically adjusted price-to-earnings (“CAPE”) ratios, sometimes referred to as normalized P/E ratios or the Shiller P/E ratio. While we don’t expect CAPE ratios to have perfect predictive power, the measure has proven to be reliable over longer time periods. In this Rocaton Insights, we review the predictability of CAPE ratios, address some of the criticisms of CAPE ratios, and examine where current equity market valuations are today.

 

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