Investor CAFÉ

Are Stocks Overvalued?

“The golden age of investing is over.” — Robert Shiller, Yale University

Is the stock market overvalued? Many pundits, including Robert Shiller and Mark Hulbert, think so, based on traditional measures such as the price-earnings (P/E) ratio, dividend yield, price/book, price/sales, CAPE and the q-ratio.

CAPE is Yale Professor Robert Shiller’s favorite index that measures the price-earnings ratio of the U.S. stock market over a 10-year period. It shows stocks almost as expensive as the late 1990s and 2007. In both cases, stocks collapsed.

The q-ratio compares the market capitalization of stocks (such as the S&P 500) with corporate earnings. The interpretation is not unlike the CAPE Index — stocks are expensive.

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