In the past few years, the US stockmarket has gone from expensive to extremely expensive. The cyclically adjusted price/earnings ratio (Cape) divides the price of an index by the average annual earnings figure over the past ten years, adjusted for inflation. It was developed by Yale economist Robert Shiller, so is often known as the Shiller p/e.
This doesn't mean stocks will fall immediately. As the chart shows, valuations can stay elevated for years at a time certainly longer than most short sellers can stay solvent. But over the very long term, valuations tend to revert to the mean. So buying stocks when Cape is high implies below-average long-term returns. This is another reason we are keener on European stocks. Capes in continental Europe tend to be in the teens.
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