Nobel prize winning economist Robert Shiller warns investors that his CAPE ratio is not a good tool for timing the market. But it is good at predicting long-term returns.
Having said that, everyone still knows from experience that a stretched CAPE ratio preceded the stock market crashes of the dotcom bubble and the credit crisis.
CAPE is calculated by taking the S&P 500 and dividing it by the average of 10 years worth of earnings. If the ratio is above the long-term average of around 16x, the stock market is considered expensive. Currently, the CAPE is at 24.42x.
On Friday, John Hussman tweeted this S&P 500 chart that lists all of the warning signs of a crash that we are experiencing now. And there are a lot.
At the top is the CAPE.
Hussman: “Anatomy of textbook pre-crash bubble. Don’t rely on further blowoff, but don’t be shocked. Risk dominates. Hold tight.”