Shiller Ratio
About the Shiller Ratio
The Shiller Ratio also known as the P/E 10 Ratio or the Cyclically Adjusted Profit Earnings Ratio (or CAPE) was developed by Dr. Robert Shiller an Economist from Yale University. Shiller analyzed the S&P 500 Index since 1871 to determine if a ratio similar in nature to the common P/E ratio but with the added twist of 10 years of Earnings Per Share (EPS) data would be effective and more accurate in determining if the market as a whole was overvalued or undervalued.
What he found was that in general a Shiller P/E Ratio of roughly 20 meant that the market was properly priced as measured against earnings averaged over the previous ten years. The Mean Shiller Ratio value stood at 16.47 while the Median stood at 15.88. The previous ten years are shown here as a summary courtesy of Dr. Shiller's data set which he provides for the public to view.
- January 2003 22.89
- January 2004 27.65
- January 2005 26.58
- January 2006 26.46
- January 2007 27.2
- January 2008 24.01
- January 2009 15.17
- January 2010 20.52
- January 2011 22.97
- January 2012 21.21
- January 2013 21.9
As one can see the Shiller P/E Ratio was rather high leading into 2008 and might have been an early indicator of the market collapse about to happen later that year. The logic is that the S&P 500 was trading too high and not justified by earnings per share figures as measured by the previous ten years adjusted for inflation (per the CPI index).
Currently as of this date (June 10, 2013) the Shiller Ratio stands at 24.06 while the P/E Ratio as usually measured stands at 18.99.
From a mathematical perspective the Shiller Ratio is calculated as follows:
PRICE
(EPS FOR EACH YEAR FOR PREVIOUS 10 YEARS x INFLATION MULTIPLIER)/10
It is therefore the current price divided by the average earnings per share for the previous ten years adjusted for inflation.
For a very good description of the Shiller Ratio please click here: http://www.pe10ratio.com/
For Shiller's Book please see this site here: http://www.irrationalexuberance.com/
