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CAPE Fear

Updated: Aug 21, 2021

This article isn't about the horror movie by the same name; neither the 1962 nor 1991 versions. It's not even about the headland jutting out into the ocean in southern North Carolina, an area known as the "Graveyard of the Atlantic" for its shipwrecks.

No, this article is about another topic, maybe not as scary but still of concern.


Specifically, I'm talking about the Shiller Cyclically Adjusted Price Earnings ratio, or CAPE for short. The Shiller CAPE is meant to be a more thorough evaluation of equity valuations by averaging forty quarters worth of inflation-adjusted earnings vs just one quarter, and then comparing that data to current equity prices. The purpose here is to smooth out the inherent lumpiness of earnings, to mitigate the impacts of one time events, whether those are positive or negative for a stock.


The “so what?” of it all is, if you tend to take stock in the efficacy of this metric, what a high CAPE may portend for future equity performance. And today, we are at historically high CAPE values not seen since the tech bubble of 1999-2000.


That may have strong implications for planning, particularly for those who are within five to ten years of retirement. More on that in a coming post.











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