CAPE / valuation regime

CAPE (cyclically-adjusted price/earnings) — Shiller’s valuation gauge: price divided by ten years of averaged, inflation-adjusted earnings, smoothing the business cycle out of the ratio. Its honest use: starting CAPE strongly conditions the following decade’s returns (a valuation regime), so high readings mean plan on below-average forward returns. Its dishonest use: timing anything shorter — it has essentially no one-year predictive power, which is why the contribution schedule never changes with it.

First used in: 5.3 · The S&P leverage point and the barbell