The ratio was publicized in the 1980s by the Yale University professor and Nobel Prize Laureate Robert Shiller and is now widely considered among the most reliable stock valuation indicators.<\/p>\n\n\n\n
It is often applied to leading stock market indices, such as the S&P 500 or individual stocks, as an indicator of potential overvaluation or undervaluation compared to the assumed intrinsic value.\u00a0<\/p>\n\n\n\n
How to calculate the Shiller P\/E Ratio?<\/h2>\n\n\n\n
The formula to calculate the Shiller P\/E Ratio is the current price of a stock or index, divided by the 10-year average earnings, adjusted for inflation.<\/p>\n\n\n\n
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<\/figure><\/div>\n\n\n\nIn this formula, Inflation-adjusted earnings deduct the annualized inflation rates from annual earning figures.<\/p>\n\n\n\n
The 10-year average figures use the arithmetic average (also known as simple average) of the inflation-adjusted earnings, thus putting equal weight on each of the last 10 accounted years.<\/p>\n\n\n\n
What is the current Shiller P\/E Ratio?<\/h2>\n\n\n\n
The current Shiller P.E Ratio<\/a> for the S&P 500 is 39.89<\/strong>. Last month the ratio was at 38.68<\/strong>, and a year ago was at 34.51.<\/strong> In fact, the ratio is now at its highest level in the last 20 years.<\/p>\n\n\n\n The current level shows an over-extension of over 100% from the last 20-year historical average, which had always resulted in abrupt market crashes.<\/p>\n\n\n\n The first step to defining a good P\/E ratio for investing is to compare it with relevant P\/E averages.<\/p>\n\n\n\n If the P\/E ratio of stock ranges close to each of those four averages, it may be considered fairly valued. Conversely, consistently higher P\/Es can show overvaluation, and consistently lower P\/Es can show undervaluation.<\/p>\n\n\n\n Despite how relative a high or low P\/E ratio can be in the last 2 decades, there are some rough estimates that we can use to determine which P\/E levels can be deemed as high, average or low:<\/p>\n\n\n\n The highest ever average P\/E ratio for the S&P 500\u00a0 was 44.19, recorded on Dec 1999, right before the .com bubble crash. Today, the P\/E is dangerously close to the same levels, close to 40.<\/em><\/p>\n\n\n\n Typically, P\/E values above 30 are high, even though it is always important to consider the relative P\/E value of a stock or index as well.<\/p>\n\n\n\n For example, the NASDAQ\u2019s P\/E Average in the last 20 years has been above 30, while the Dow Jones is closer to 15.<\/p>\n\n\n\n In bull markets, high P\/E ratios are often found in risk-on assets and industries, such as information technology, consumer discretionary, and financials.<\/p>\n\n\n\n Different market indices and sectors verify significantly on the average P\/Es<\/a>:<\/p>\n\n\n\n The average P\/E Ratios for the Dow Jones indices are respectively: Industrials at 18.71, Transportation at 20.59, and Utilities at 21.50.<\/p>\n\n\n\n The S&P 500 traditionally has a significantly higher P\/E than the DOW, with a 10 year average of 26.1. The historic P\/E average<\/a> for the S&P 500 since 1870 is 16.90 and has been monotonically increasing every single decade until today. <\/p>\n\n\n\n However, the king of extremely high P\/E ratios during bull cycles is the NASDAQ 100, which has an average P\/E of 29.1, which is over 50% bigger than the DOW Industrial index.<\/p>\n\n\n\n Even though such a P\/E of 29.1 is considered quite high for most indices, for the tech-heavy NASDAQ index, it\u2019s rather considered a normal expectation considering the exponential growth that is typically observed in tech stocks\u00a0<\/p>\n\n\n\n The historical minimum for the S&P 500\u00a0 P\/E ratio was 4.78 in the 1920s. The most recent low figure in the last 20 years had been 15.05.<\/p>\n\n\n\n Accounting for current trends, a low P\/E ratio is typically considered being below 20 for most sectors.<\/p>\n\n\n\n In bull markets, low P\/E ratios are hard to find and primarily identified in more traditional and established companies in the sectors of commodities, energy, utilities, material, industrials, and consumer staples.<\/p>\n\n\n\n The Shiller P\/E ratio is a reliable measure of valuation when compared against the historic P\/E ranges and averages of the same stock, as well as when compared to its industry, index, and close competitors.<\/p>\n\n\n\n However, the ratio must also be together with other market metrics:<\/p>\n\n\n\n AAII Sentiment<\/a> Qualitative factors also need to be considered, such as the current monetary policies, the political climate, market confidence expectations, etc.<\/p>\n\n\n\n Roughly speaking, in a market with a bullish horizon, higher P\/E ratios are the norm, as investors\u2019 expectation is for the earnings to grow in the short-medium term. <\/p>\n\n\n\n Such optimistic expectations allow investors to overtake higher risk and volume investments, which appreciates the current stock\u2019s price and increases the P\/E ratios.<\/p>\n\n\n\n There are several issues with using the Shiller P\/E ratio as a standalone valuation metric.<\/p>\n\n\n\n The short answer is that yes, the Shiller P\/E ratio has been one of the most consistent indicators to warn about long-term undervalued or over-valued stocks and indices. <\/p>\n\n\n\nWhat is a good P\/E ratio for investing?<\/h2>\n\n\n\n
4.1 High P\/E ratio<\/strong><\/h3>\n\n\n\n
4.2 Average P\/E ratio<\/strong><\/h3>\n\n\n\n
4.3 Low P\/E ratio<\/strong><\/h3>\n\n\n\n
How to use the Shiller P\/E Ratio?<\/h2>\n\n\n\n
VIX Index<\/a>
S&P Market-Cap Concentration<\/a>
Personal Savings Rate<\/a>
Buffet Indicator<\/a>
Put\/Call Ratio<\/a>
Margin Debt to Cash<\/a>
Velocity of M2 Money Stock<\/a>
Debt \/ GDP ratio<\/a>
Unemployment rate<\/a>
DXY Index<\/a><\/p>\n\n\n\nWhat are the limitations of the Shiller P\/E ratio?<\/h2>\n\n\n\n
Is the Shiller P\/E Ratio a reliable indicator?<\/h2>\n\n\n\n