Heading into Recession - Stock Market to Correct Further DownShiller S&P 500 P/E Ratio is a golden standard to evaluate the stock market
Looking at the Shiller S&P 500 P/E Ratio we can clearly see the market was overvalued and is now in the beginning of a correction down.
I expect this trend to continue downwards and then have the usual reflexive rebound from oversold conditions and then tripple waterfall down (the final leg down).
Instead of dividing by the earnings of one year (see chart above), this ratio divides the price of the S&P 500 index by the average inflation-adjusted earnings of the previous 10 years. The ratio is also known as the Cyclically Adjusted PE Ratio (CAPE Ratio), the Shiller PE Ratio, or the P/E10.
What Does the Shiller PE Tell You?
The Shiller P/E gives investors a read on whether the stock market—as represented by the S&P 500—is overvalued or undervalued. The higher the Shiller P/E ratio, the more overvalued a market.
For context, over more than 100 years, the average and median Shiller P/E ratio has been around 15 or 16, spiking up significantly higher often before market crashes.
But the all-time high in the Shiller P/E ratio was December 1999, when the figure reached 44.19. This high coincided with the dot-com driven rally in tech stocks of the late 1990s. Based in part on that record high ratio, Shiller correctly predicted that the dot-com frenzy would turn out to be a bubble.
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