"Fair CAPE" didn't exist until 2017 (edit: Actually Shiller didn't come out with his new Earnings-Cape-Yield theory until Sept 2018). CAPE has failed as a prediction tool, so they've added a new variable. We only have a few years of out-of-sample data so far, so I guess we'll have to see. At least this proves that using valuations in the past has not been useful. Maybe this new equation will be useful going forward..Nathan Drake wrote: ↑Wed May 18, 2022 12:08 pm Fair CAPE was low in the early 2010s
Fair CAPE was moderate slightly high in mid 2010s, and became scorching the past few years
Here's a good read, which I hadn't seen before.
https://mebfaber.com/wp-content/uploads ... ecasts.pdf
I like how he says, "beginning around 1985"... since CAPE was formulated in 1988, basically he's saying CAPE has pretty much ALWAYS failed to make accurate predictions using out-of-sample data.Professors John Campbell and Robert Shiller’s (1988) cyclically-adjusted P/E (or, CAPE) ratio is
arguably the most widely-followed metric in the investment profession to judge whether or not a
stock market is fairly valued. The CAPE ratio’s popularity is due in part to the power of mean
reversion. A high (low) cyclically-adjusted P/E (CAPE) ratio has been associated with below average (above-average) 10-year-ahead U.S. stock returns.
Nevertheless, stock return predictions using the Shiller CAPE ratio have generally not performed
well more recently. Beginning around 1985, average out-of-sample forecast errors of the
predicted returns ten years ahead (i.e., 1995 and on) have been larger than if one had used the
trailing historical long-run average. The rise in average forecast error has coincided with the
secular rise in the CAPE ratio above its 1926-1984 average of 14.6. Indeed, the Shiller CAPE
ratio has defied mean reversion since that time, having only once dropped below its long-run
average. And realized U.S. stock returns over the past three decades have been robust,
notwithstanding the global financial crisis
With that fact, it's embarrassing that CAPE is still "arguably the most widely-followed metric in the investment profession to judge whether or not a stock market is fairly valued."
This paper was written in July 2017.On a keynote panel at the 70th Annual CFA National Conference in May 2017, Professors
Jeremy Siegel and Robert Shiller both cited low interest rates as a potential factor in the extended
period of elevated CAPE ratios, although neither explicitly quantified the link between interest
rates and future stock returns. This paper does just that.
I've been arguing, for 14 years here on these boards, that the original CAPE predictions were not useful. If Faber, Siegel, and Shiller himself agree with me, can you guys stop trying to pretend valuations were useful in the past?
We'll have to see how this new valuations theory works going forward before we can fully judge it.