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Tags: Robert Shiller | P-E price-earnings | ratio | stock market risk

WSJ's Jakab: Rise in Shiller P-E Ratio Carries Risk for Stock Market

By    |   Monday, 24 March 2014 11:09 AM

The cyclically-adjusted price-earnings (P-E) ratio developed by Yale economist Robert Shiller has risen to levels that offer a warning sign to the stock market, writes Spencer Jakab of The Wall Street Journal.

Shiller's ratio uses 10 years of earnings instead of the standard one-year to lessen the effect of short-term fluctuations.

The measure stood at 25.73 Monday morning, 56 percent higher than the 16.52 average since 1881.

Editor's Note: 38 Investments That Have a 96% Win Rate

The Shiller P-E ratio spiked before market busts in 1929, 2000 and 2007, but also before periods when the market didn't plunge, Jakab notes.

Still, the ratio now sits in the top 10 percent of its historical range, and in the past, such a level has presaged an average negative 1.4 percent real, compounded, annual drop in the Standard & Poor's 500 Index over the next decade, Jakab says.

Some Wall Street bulls minimize the importance of the Shiller P-E ratio, arguing that historically high profit margins can continue.

"Perhaps investment firms that were caught out by recent debacles are right this time and not the man who identified" the housing bubble of the mid-2000s and the technology-stock bubble of the late 1990s, Jakab writes. "But 140 years of market history say otherwise."

Meanwhile, Cam Hui, a portfolio manager at Qwest Investment Fund Management, says that P-E ratios are high enough to indicate stocks aren't in a secular bull market.

"P-E ratios are elevated today," he writes on Investing.com. "They aren't stupidly high, but there is no question that they are above average."

Editor's Note: 38 Investments That Have a 96% Win Rate

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The cyclically-adjusted price-earnings (P-E) ratio developed by Yale economist Robert Shiller has risen to levels that offer a warning sign to the stock market, writes Spencer Jakab of The Wall Street Journal.
Robert Shiller,P-E price-earnings,ratio,stock market risk
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2014-09-24
Monday, 24 March 2014 11:09 AM
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