What is the Shiller CAPE ratio?
The Shiller CAPE ratio is the price of the S&P 500 divided by its average earnings over the past ten years, with both adjusted for inflation. It shows how much investors pay for each dollar of profit, smoothed over a full business cycle.
How it works
It is a version of the price to earnings (P/E) ratio. Using ten years of earnings instead of one smooths out booms and recessions, so a single great or terrible year does not distort the picture. Yale economist Robert Shiller made it popular, building on an idea from Benjamin Graham.
Reading it
The data goes back to 1881, and the long run average is roughly 16 to 17. Higher readings mean stocks are expensive compared with their earnings history. Some of the highest readings came near the 1929 and 2000 market peaks.
Limits
CAPE says little about timing. Markets have stayed above average for many years. Changes in accounting rules, interest rates, and the mix of companies in the index can also push it higher than in the past.
Frequently asked questions
What is a normal CAPE ratio?
The long run average since 1881 is roughly 16 to 17, though it has been well above that for most of the past few decades.
Does a high CAPE mean a crash is coming?
No. High readings have tended to come before lower returns over the following ten years, on average, but CAPE cannot say when or whether prices will fall.