S&P 500 hits 3,100, CAPE Ratio signals caution – Forbes


In an editorial article published by Forbes, Senior Contributor Rob Isbitts cited the US equity markets, including the benchmark S&P 500 index, behaving like a knucklehead.

Key quotes

“The S&P 500 Index and the stock market are acting erratically. Moreover, they are as indecisive as I have seen in over 30 years of watching them.

The future is one big uncertainty, economically and in general.

Despite this situation, there is still a strong feeling among many investors that the “big risk event” is off the table.

It is as if we all know that a 30% decline like the one we had a few months ago is the only one allowed in the decade of the 20’s.

CAPE Ratio, created by Yale Economic Robert Shiller, smooths out the earnings of the S&P 500 companies over many years, and factors in inflation. The result has been a very good predictor of when stock market risk is abnormally high.

The CAPE stood at 27.64 times earnings at the end of April. And with the market a few percentage points higher since that time, and S&P 500 earnings crashing, the CAPE might just be on its way into the 30+ range again.

The only other spike to this level was in the year 2000. That started 3 years of S&P 500 decline. In a row. And a nearly 50% peak-to-trough drop.

In other words, please don’t underestimate the risk that still exists in the stock market. The market is not a noble being.”

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