Is the Stock Market Overvalued? Analysis of the CAPE Ratio

This article explains why stocks might not be overvalued today and uses it as a discussion to avoiding mistakes when interpreting data. It’s a useful lesson that should be remembered when interpreting market data or listening to discussions about markets.

As you can see, a higher CAPE ratio is typically correlated with stock market peaks, but this is not always true. The problem with these charts is that the conclusions we could draw from them are limited. Why? Nearly all of the months with a CAPE > 30 occurred in just two time periods: the Great Depression (1929) and the DotCom Crash (1999). So as “predictive” as they might seem, we simply don’t have enough U.S. market history to examine.

So does the current CAPE > 30 = bubble? I don’t know, but there doesn’t seem to be enough data to justify it with a high degree of certainty. In addition, how CAPE is defined has technically changed over time.