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What it is – How it works
By Michael Zhuang MS www.MZCap.com
This Shiller PE index is a stock market metric invented by Yale University Professor Robert Shiller, PhD.
Basically, it is the average PE ratio of all S&P 500 stocks for the last ten years. The Shiller PE is also called PE10. Professor Shiller found it to be a reasonably good measure of valuation of the whole market.
IOW: The higher the Shiller PE, the more expensive the market. So, with Shiller PE at 24, we can call this market relatively expensive.
Assessment
Here is what I know currently.
- The higher the Shiller PE – the lower the one-year and three-year return propensity.
- Return variability is so high as to render the Shiller PE’s predictive power very weak.
- Only when Shiller PE is over 35 are the three-year forward returns overwhelmingly negative.
So, the market may or may not be headed for a fall immediately, but we do need to temper our expectation of future returns.
About the Author
Michael Zhuang is founder and principal of MZ Capital, a fee-only registered investment advisor firm located in the Greater Washington D.C. metropolitan area.
Conclusion
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