Cape: Heed this stock barometer

The cyclically adjusted price/earnings (Cape) ratio is far from perfect as a valuation measure. But it's certainly worth paying some attention to.

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We've always been fans of the cyclically adjusted price/earnings (Cape) ratio as a valuation measure. The Cape (also known as the Shiller p/e, because it was popularised by Nobel-prize-winning economist Robert Shiller) compares the price of a market with its annual earnings, averaged over the past ten years. The idea is that this figure should be mean-reverting when market valuations swing too far to one side or the other of the long-term trend (in other words, if they become very cheap or very expensive), then they are likely to move back towards their historic average.

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John Stepek

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.