Everything Is Overvalued

By Chris Lowe, Editor-at-Large on June 2, 2015

Everything is overvalued…

That’s the latest warning from Nobel prize-winning economist Robert Shiller… the guy who predicted the dot-com crash.

In an interview with Goldman Sachs, Shiller said:

This time around, bonds and, increasingly, real estate also look overvalued. This is different from other over-valuation periods such as 1929, when the stock market was very overvalued, but the bond and housing markets for the most part weren’t. It’s an interesting phenomenon.

One valuation measure Shiller draws attention to is the CAPE (Cyclically Adjusted Price-Earnings) ratio.

Instead of comparing one year of corporate earnings to the share prices, it looks at the inflation-adjusted average of the previous 10 years of earnings to control for year-to-year swings in earnings.

Although some people take issue with this measure, as Shiller put it, the CAPE ratio has been a “good predictor of subsequent stock market returns, especially over the long run.”

As you can see below, the CAPE ratio of the S&P 500 is now above 27.

060215 DRE shiller PE

The only times the S&P 500’s CAPE ratio was this high or higher was before the Great Depression, the dot-com bust, and the 2008 financial crisis.

P.S. Strange as it may seem, there is a bigger threat to your financial security than a collapse in stocks. It could shut down your entire town or city. It could even tear the country apart. Bill has assembled the full, shocking details here.

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