{"id":25928,"date":"2017-09-21T10:46:02","date_gmt":"2017-09-21T15:46:02","guid":{"rendered":"http:\/\/olduvai.ca\/?p=25928"},"modified":"2017-09-21T10:46:24","modified_gmt":"2017-09-21T15:46:24","slug":"stock-market-bubbles-in-perspective","status":"publish","type":"post","link":"https:\/\/olduvai.ca\/?p=25928","title":{"rendered":"Stock Market Bubbles in Perspective"},"content":{"rendered":"<div class=\"top_panel_title top_panel_style_3 title_present scheme_original is_page_paddings_yes\">\n<div class=\"top_panel_title_inner top_panel_inner_style_3 title_present_inner\">\n<div class=\"content_wrap\">\n<h3 class=\"page_title\"><a href=\"https:\/\/meritocracycapital.com\/stock-market-bubbles-shiller-cape\/\">Stock Market Bubbles in Perspective<\/a><\/h3>\n<\/div>\n<\/div>\n<\/div>\n<div class=\"page_content_wrap page_paddings_yes\">\n<div class=\"content_wrap\">\n<div class=\"content\">\n<article class=\"itemscope post_item post_item_single post_featured_default post_format_standard post-2801 post type-post status-publish format-standard has-post-thumbnail hentry category-earnings category-leverage category-valuation\">\n<section class=\"post_content\">Last week marked the 9<sup>th<\/sup> anniversary of the collapse of Lehman Brothers. It was one of the biggest milestones of the Global Financial Crisis (\u201cGFC\u201d) that began approximately a year earlier in 2007. Corporate earnings were abnormally weak during the GFC. I bring that up because a much cited stock market valuation metric that has been prescient gauging past bubbles could be overstated due to those abnormally weak earnings. Those of you concerned about the valuation of the U.S. stock market should read on.<\/p>\n<h6>What Does Average Mean?<\/h6>\n<p>The cyclically-adjusted price-to-earnings (\u201cCAPE\u201d) ratio is normally credited to Nobel-prize winning economist Robert J. Shiller. It adjusts for the ups and downs of business cycles by comparing the price of the S&amp;P Composite Index to the <em>average<\/em>, annual inflation-adjusted earnings of that index over the previous 10 years. There are three types of <a href=\"http:\/\/www.dictionary.com\/e\/mean-median-mode\/\" target=\"_blank\" rel=\"noopener\">averages<\/a>: mean, median and mode. The type of average the CAPE ratio uses is the <strong>mean<\/strong> (a.k.a. arithmetic mean). Though the CAPE ratio has been shown to be a reliable predictor of future long-term stock market returns, it has also been widely criticized.<\/p>\n<p>One criticism is that the CAPE ratio is susceptible to outliers. For example, those abnormally weak earnings that occurred during the GFC drag the <em>mean<\/em>, annual inflation-adjusted earnings <em>down<\/em>. This could make the CAPE ratio of the S&amp;P Composite Index look more expensive than it may actually be. It has been widely reported that the CAPE ratio is currently at a very high level behind only two other stock market peaks: 1) the Tech Bubble, and 2) the stock market bubble that occurred during the Roaring Twenties (immediately preceding the Great Depression). In both cases, the stock market eventually crashed and in spectacular fashion.<\/p>\n<p>&#8230;click on the above link to read the rest of the article&#8230;<\/p>\n<\/section>\n<\/article>\n<\/div>\n<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Stock Market Bubbles in Perspective Last week marked the 9th anniversary of the collapse of Lehman Brothers. It was one of the biggest milestones of the Global Financial Crisis (\u201cGFC\u201d) that began approximately a year earlier in 2007. Corporate earnings were abnormally weak during the GFC. I bring that up because a much cited stock [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[2],"tags":[16091,16092,15547],"class_list":["post-25928","post","type-post","status-publish","format-standard","hentry","category-economics","tag-howard-ma","tag-meritocracy-capital","tag-stock-market-bubbles"],"_links":{"self":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/25928","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=25928"}],"version-history":[{"count":2,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/25928\/revisions"}],"predecessor-version":[{"id":25930,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/25928\/revisions\/25930"}],"wp:attachment":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=25928"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=25928"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=25928"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}