Jeremy Siegel: This time is different

http://www.nytimes.com/2012/10/14/your-money/debating-cape-a-10-year-prism-for-valuing-stocks.html AFTER the tech crash a decade ago, investors started giving closer attention to the prices they pay for stocks. Some have turned to a tool known as the cyclically adjusted price-to-earnings ratio, or CAPE, to determine whether stocks are cheap or expensive. Yet while this version of the P/E ratio,... [more]

http://www.nytimes.com/2012/10/14/your-money/debating-cape-a-10-year-prism-for-valuing-stocks.html AFTER the tech crash a decade ago, investors started giving closer attention to the prices they pay for stocks. Some have turned to a tool known as the cyclically adjusted price-to-earnings ratio, or CAPE, to determine whether stocks are cheap or expensive. Yet while this version of the P/E ratio, popularized by the Yale economist Robert J. Shiller, correctly signaled frothy markets in 1929, 1999 and 2008, some strategists argue that it may not be as accurate in gauging valuations today as it was in the past. “The basic idea of smoothing out earnings over time is excellent,” Mr. Siegel says. But he points out that the current CAPE for domestic stocks includes a 90 percent annual earnings decline in the first quarter of 2009. “You’re averaging in an unbelievable hole in profits,” he says. Mr. Shiller, who is widely credited with having warned investors about the tech crash and the more recent housing bubble, concedes that “corporate earnings have been unusually volatile in the past decade.” But he argues that this is more reason — not less — to use normalized earnings in calculating the market’s P/E. “What alternatives do people have?” he asked in an interview. For instance, he says, if volatile swings in profits affect 10-year averages, surely they would distort P/E’s based on 12 months of profits even more. (Mr. Shiller is a regular contributor to the Economic View column in Sunday Business.) http://www.nytimes.com/2012/10/14/your-money/debating-cape-a-10-year-prism-for-valuing-stocks.html [less]