{"id":9043,"date":"2014-01-26T16:02:51","date_gmt":"2014-01-26T21:02:51","guid":{"rendered":"http:\/\/goldstocksforex.com\/?p=9043"},"modified":"2014-01-26T16:02:51","modified_gmt":"2014-01-26T21:02:51","slug":"beware-of-the-cape","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2014\/01\/26\/beware-of-the-cape\/","title":{"rendered":"Beware of the CAPE"},"content":{"rendered":"

I have just read John Mauldin’s warning<\/a> that the market is overvalued:<\/p>\n

Not only does today’s CAPE of 25.4x suggest a seriously overvalued market, but the rapid multiple expansion of the last few years coupled with sluggish earnings growth suggests that this market is also seriously overbought, as I pointed out last week and as we are seeing play out this week.<\/p><\/blockquote>\n

\"CAPE\"<\/p>\n

Robert Shiller’s CAPE ratio compares the current index price to a 10-year simple moving average of inflation-adjusted earnings in order to smooth out earnings and provide a long-term indication as to whether the market is under- or over-valued. But ratios are far from infallible. One of the first things fundamental investors\/traders learn is: do not buy a stock simply because the Price-to-Earnings (PE) ratio is low, and never short a stock simply because the PE ratio is high. The reason is fairly obvious. In the first case, current earnings may be expected to fall and, with high PE ratios, earnings are likely to grow.<\/p>\n

Let’s examine CAPE more closely. First, we have experienced the worst recession in almost a century; so does a moving average of the last 10 years adequately reflect sustainable long-term earnings? In the chart below I removed the highest and lowest quarter’s earnings in the last 10 years [dark green]. Note the visible difference losses reported in Q\/E December 2008 make to the long-term average.<\/p>\n

\"Price<\/p>\n

The chart also highlights the fact that Shiller’s CAPE is relatively low compared to the last 15 years, where the average is close to 30. The normal PE of 18.4, calculated on the last 12-month’s earnings*, is also low compared to an average of 28 for the last 15 years.<\/p>\n

*Reporting for the December quarter is not yet completed and unreported earnings are based on S&P estimates.<\/p>\n

As novice investors learn, it is dangerous to base buy or sell signals on a PE ratio, whether it is CAPE or regular PE based on 12-months earnings. Using CAPE, we would have sold stocks in 1996 and again in 2003, missing two of the biggest bull markets in history. And we would have most likely bought in 2008, when CAPE made a new 10-year low, right before the collapse of Lehmann Brothers.<\/p>\n

I submit that CAPE or PE ratios are not an end in themselves, but merely a useful tool for highlighting expectations of future earnings. At present both ratios are rising, suggesting that earnings prospects are improving.<\/p>\n","protected":false},"excerpt":{"rendered":"

I have just read John Mauldin’s warning that the market is overvalued: Not only does today’s CAPE of 25.4x suggest a seriously overvalued market, but the rapid multiple expansion of the last few years coupled with sluggish earnings growth suggests that this market is also seriously overbought, as I pointed out last week and as … <\/p>\n

Continue reading “Beware of the CAPE”<\/span><\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[57,34],"tags":[567,1978,2626,2750,2979],"class_list":["post-9043","post","type-post","status-publish","format-standard","hentry","category-stock-markets","category-us-canada-countries-regions","tag-cape","tag-john-mauldin","tag-pe-ratio","tag-price-earnings-ratio","tag-robert-shiller"],"yoast_head":"\nBeware of the CAPE - the patient investor<\/title>\n<meta name=\"robots\" content=\"noindex, follow\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Beware of the CAPE - the patient investor\" \/>\n<meta property=\"og:description\" content=\"I have just read John Mauldin’s warning that the market is overvalued: Not only does today’s CAPE of 25.4x suggest a seriously overvalued market, but the rapid multiple expansion of the last few years coupled with sluggish earnings growth suggests that this market is also seriously overbought, as I pointed out last week and as … Continue reading "Beware of the CAPE"\" \/>\n<meta property=\"og:url\" content=\"https:\/\/thepatientinvestor.com\/index.php\/2014\/01\/26\/beware-of-the-cape\/\" \/>\n<meta property=\"og:site_name\" content=\"the patient investor\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/profile.php?id=61572934660810\" \/>\n<meta property=\"article:published_time\" content=\"2014-01-26T21:02:51+00:00\" \/>\n<meta property=\"og:image\" content=\"http:\/\/static.incrediblecharts.com\/images\/2014\/mauldin-cape.png\" \/>\n<meta name=\"author\" content=\"ColinTwiggs\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"ColinTwiggs\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"2 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/thepatientinvestor.com\/index.php\/2014\/01\/26\/beware-of-the-cape\/#article\",\"isPartOf\":{\"@id\":\"https:\/\/thepatientinvestor.com\/index.php\/2014\/01\/26\/beware-of-the-cape\/\"},\"author\":{\"name\":\"ColinTwiggs\",\"@id\":\"https:\/\/thepatientinvestor.com\/#\/schema\/person\/cb072791ac83e8bae585007c133d54a5\"},\"headline\":\"Beware of the CAPE\",\"datePublished\":\"2014-01-26T21:02:51+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\/\/thepatientinvestor.com\/index.php\/2014\/01\/26\/beware-of-the-cape\/\"},\"wordCount\":404,\"commentCount\":28,\"publisher\":{\"@id\":\"https:\/\/thepatientinvestor.com\/#organization\"},\"image\":{\"@id\":\"https:\/\/thepatientinvestor.com\/index.php\/2014\/01\/26\/beware-of-the-cape\/#primaryimage\"},\"thumbnailUrl\":\"https:\/\/www.incrediblecharts.com\/images\/2014\/mauldin-cape.png\",\"keywords\":[\"CAPE\",\"John Mauldin\",\"PE ratio\",\"price-earnings ratio\",\"Robert Shiller\"],\"articleSection\":[\"Stock Markets\",\"US & Canada\"],\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"CommentAction\",\"name\":\"Comment\",\"target\":[\"https:\/\/thepatientinvestor.com\/index.php\/2014\/01\/26\/beware-of-the-cape\/#respond\"]}]},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/thepatientinvestor.com\/index.php\/2014\/01\/26\/beware-of-the-cape\/\",\"url\":\"https:\/\/thepatientinvestor.com\/index.php\/2014\/01\/26\/beware-of-the-cape\/\",\"name\":\"Beware of the CAPE - 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Nobel laureate Robert Shiller this week commented that he was no longer buying stocks as he\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":17741,"url":"https:\/\/thepatientinvestor.com\/index.php\/2019\/01\/15\/pemax-why-you-should-be-cautious-using-robert-shillers-cape\/","url_meta":{"origin":9043,"position":2},"title":"PEmax and why you should be wary of Robert Shiller’s CAPE","author":"Colin Twiggs","date":"January 15, 2019","format":false,"excerpt":"Robert Shiller's groundbreaking works, Irrational Exuberance and Animal Spirits, led to a Nobel prize in 2013 but we need to be careful of placing too much reliance on his CAPE as an indicator of stock market value. What is CAPE? CAPE is the cyclically adjusted price-to-earnings ratio, normally applied to\u2026","rel":"","context":"In "Earnings & Dividends"","block_context":{"text":"Earnings & Dividends","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/investing\/earnings-dividends\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":62182,"url":"https:\/\/thepatientinvestor.com\/index.php\/2025\/07\/26\/us-market-leading-indicators-10\/","url_meta":{"origin":9043,"position":3},"title":"US Market Leading Indicators","author":"Colin Twiggs","date":"July 26, 2025","format":false,"excerpt":"The gauge on the left indicates bull or bear market status, and the one on the right reflects stock market drawdown risk. Bull\/Bear Market The Bull\/Bear indicator remains at 60%, with two of five leading indicators signaling risk-off: The Chicago Fed National Financial Conditions Index declined to -0.55, with expanding\u2026","rel":"","context":"In "US & Canada"","block_context":{"text":"US & Canada","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/countries-regions\/us-canada-countries-regions\/"},"img":{"alt_text":"Bull\/Bear Market Indicator","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2025\/2025-05-09-us-bull-bear-gauge.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2025\/2025-05-09-us-bull-bear-gauge.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2025\/2025-05-09-us-bull-bear-gauge.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]},{"id":16039,"url":"https:\/\/thepatientinvestor.com\/index.php\/2017\/12\/09\/cape-v-pemax-how-hot-are-market-valuations\/","url_meta":{"origin":9043,"position":4},"title":"CAPE v PEMAX: How hot are market valuations?","author":"Colin Twiggs","date":"December 9, 2017","format":false,"excerpt":"Robert Shiller's CAPE ratio is currently at 32.17, the second-highest peak in recorded history. According to multpl.com, prior to the Black Tuesday crash of 1929 CAPE had a reading of 30. The only peak with a higher reading is the Dotcom bubble at 44. Click here to view at multpl.com.\u2026","rel":"","context":"In "Quotes"","block_context":{"text":"Quotes","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/quotes\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":63760,"url":"https:\/\/thepatientinvestor.com\/index.php\/2026\/02\/28\/us-market-snapshot-13\/","url_meta":{"origin":9043,"position":5},"title":"US Market Snapshot","author":"Colin Twiggs","date":"February 28, 2026","format":false,"excerpt":"The gauge on the left indicates whether the market is in a bull or bear phase, and the indicator on the right reflects the current valuation of the stock market. Stock market pricing indicates whether stocks are cheap or expensive in relation to earnings, but it is a poor indicator\u2026","rel":"","context":"In "US & Canada"","block_context":{"text":"US & Canada","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/countries-regions\/us-canada-countries-regions\/"},"img":{"alt_text":"Bull\/Bear Market Indicator","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2025\/2025-08-06-us-bull-bear-gauge.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2025\/2025-08-06-us-bull-bear-gauge.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2025\/2025-08-06-us-bull-bear-gauge.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]}],"_links":{"self":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/9043","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/comments?post=9043"}],"version-history":[{"count":0,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/9043\/revisions"}],"wp:attachment":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/media?parent=9043"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/categories?post=9043"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/tags?post=9043"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}