It’s almost the end of 2015, and that means Business Insider is rounding up reflections on the year from the smartest people on Wall Street.
One of those people is Josh Brown, author, commentator and CEO of Ritholtz Wealth Management.
He and his team sent us this chart to remind us that 2015 was yet another year in which the market defied our expectations for what is normal.
This is a chart of Yale economist Robert Shiller’s CAPE ratio since 1926.
What CAPE is supposed to show is the ratio of prices to company earnings in the stock market.
When it’s high, it should be telling us that stocks are expensive, when it’s low it should tell us that stocks are cheap.
You can see what it’s telling us in 2015. Stocks are expensive, don’t buy. It’s a bear argument.
But as Josh (and his colleague, Mike Batnick, who helped out with this) pointed out, CAPE tends to go up historically. And a high ratio doesn’t necessarily mean doomsday.
“The CAPE ratio, which many bears have used as an excuse not to be allocated to equities, is in the most expensive quintile (top 20%) of valuations of all time since 1995 – and yet, the stock market has still managed to gain 445% during this time,” Brown wrote in an email to Business Insider.
“It’s basically saying that simply looking at 10 year’s worth of average earnings multiples will not allow one to time the market.”
The average historic CAPE ratio for the market is 17, and right now it’s at 26.7.
Back in September when it was around 25, Shiller himself spoke to CNBC and said that a going back to the average would be a huge hit to the stock market — a hit of about 30%.
Before the market crashed in 2000 CAPE hit 44, so we could also have more room to run here.
“Nobody can really forecast the market accurately. But I think this is a risky time,” Shiller told CNBC.
That’s basically a ‘you do you’ from Shiller. So do you.