Dr. Shiller's Excess CAPE Yield: Are US stocks overvalued?


In an article he co-worte in October, the 2013 Nobel-winning economist Robert Shiller suggested that the current stock price in the United States is not overvalued, using a new indicator “Excess CAPE Yield”, or ECY for short. Let’s start with CAPE:

Proposed by Shiller as well, CAPE stands for “cyclically adjusted price-to-earnings ratio”, namely the price-to-earnings ratio adjusted for 10-year inflation and seasonal factors. CAPE is used to represent the real rating of stocks.

ECY is the inverse of CAPE subtracted by US 10-year bond yield (risk-free rates). The higher ECY gets, the more attractive stocks are.

When the stock price gets too high, return from stocks tends to be lower than return from bonds for the next 10 years. When ECY gets low, stocks might start to decline, as seen in 2008 and 2018.

If we compare ECY with 10-year real excess return of S&P 500, the two lines align with one another.

What indicator should we use?

The stock market kept hitting record highs despite the pandemic. Are the stocks overpriced? Different indicators have suggested different narratives. While Shiller’s CAPE has reached 20-year high, his ECY tells a different story. In his recent blog, ECY in the US is still high. Fed Chair Powell has also discussed whether the stocks are overpriced in the press conference after Fed’s December meeting, during which he implied high P/E ratio does’t necessarily represent overvaluation, as risk-free 10-year bond yield is still low.

The pandemic has brought volatilities and raised tremendous uncertainties. Based on Shiller’s proposal, ECY could better represent the real situation in the current stock market. As far as we are concerned, investors should not base investment decisions on a single indicator. Doing more research and making proper asset allocations are the keys to achieving higher win rate.