A classic sign of a bubble in US stocks
Bullish investors in American equities have called a key stock-market metric into question.
Robert Shiller's Cape ratio has "gained wide acceptance as an accurate gauge of the stock market", writes John Authers in the FT. But the Cape or cyclically adjusted price/earnings (p/e) multiple which compares share prices to average earnings over ten years is "under attack" from rival economist Jeremy Siegel.
The Cape currently signals that the American stock market is overvalued by 62% and "more expensive than any other big stock market". However, Siegel claims the ratio as it stands has an in-built bias that makes current equity prices look more expensive than they are, and many investors agree.
Savita Subramanian, head of US equity and quantitative strategy at Bank of America Merrill Lynch, claimed last month that "15 other measures showed the US market to be either cheap or at fair value". Meanwhile, investors complain that, besides a dip during the March 2009 crash, the Cape has implied that US equities have been overvalued for 22 years.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
As such, Siegel has created his own version of the Cape, which he believes corrects the problem by adjusting for company write-downs, "which were extreme for financial companies in 2008 and 2009". Siegel's revised Cape suggests that US equities are cheap.
However, says Authers, defenders of the Cape, which remained well above its average from 2003 to 2007, suggesting that the rally was unsustainable (which it was), note that a classic sign of a bubble is "casting doubt on metrics" that don't tell the story the bulls want to hear.
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
MoneyWeek is written by a team of experienced and award-winning journalists, plus expert columnists. As well as daily digital news and features, MoneyWeek also publishes a weekly magazine, covering investing and personal finance. From share tips, pensions, gold to practical investment tips - we provide a round-up to help you make money and keep it.
-
The five insurance policies you should have
Some insurance cover will be more important than others. We look at five insurance policies you may need to have to make sure you aren’t caught out in an emergency
-
Is Donald Trump putting the US dollar in danger?
Donald Trump's administration sees one of its greatest advantages – the US dollar – as a burden. Gold is the obvious beneficiary, says Cris Sholto Heaton.