Here's a good ratio for a cape, such as Cape May, NJ: The more people going there, the greater the misery when you get stuck in traffic.
But the CAPE ratio actually stands for Cyclically Adjusted Price/Earnings. We assume that clears that up. Nothing more to say really...
Okay, we'll help you out. Stock market analysts use the CAPE ratio to measure S&P 500 companies' earnings per share, for example, over a 7-10 year period. It is believed that this will help smooth out any big fluctuations that can happen in short-term bursts. The goal is to look at things over a relatively long time. Like a full economic cycle.
Doing this can help determine if the market is overvalued or undervalued. Since recessions cause most companies' earnings to go down, the inventor of the CAPE ratio, Robert Shiller, believes one should take an average of earnings over 7-10 years. In 1997, Shiller said the CAPE ratio was at a record high that year thanks to high stock prices and lower earnings, and he predicted the value of the stock market would be 40% lower in 10 years. Sure enough, the stock market plunged 60% in 2008 at the start of the Great Recession.
The CAPE ratio is also very high at the moment in 2018, with stock prices up and a CAPE ratio of 33.78. The long-term average is 16.8, so who knows when the next market correction will occur? (Shiller, maybe? If you know him, can you give him our number...)
Related or Semi-related Video
Finance: What are normalized earnings?5 Views
Finance allah shmoop what are normalized earnings All right this
is norm or it's supposed to be We just couldn't
get the licensing rights from him So this is our
public domain version of norm from cheers Sorry And this's
normal that's a bell curve Yeah you're in the ebola
abatement business Each year the government spends a few bucks
on you Just keep you alive Is a business in
case Well you know a few hundred million peoples faces
start melting off like you know that scene in indiana
jones you know the good ones so your earnings are
usually here and here and here and here a buck
a buck twelve twenty three twenty four years I'm like
that But then one year after miss malaria's high school
biology class takes a field trip to study monkeys bats
and beetle crap in caves in central ghana Well your
business picks up So this year when the gove is
having to spend a fortune on ebola abatement you were
nine dollars and forty two cents a share And since
world awareness has suddenly shot up the most popular yahoo
search term index that thing well next year you'll still
learn five seventeen to share even though most the ebola
is pretty much gone now But then things quiet down
in life goes back to normal where your earnings are
you know normal and you could plot some kind of
line through them And if someone asked you what normalized
earnings are in your little ebola abatement company well you
could say that your normalized earnings are in about a
buck twenty Well fortunately making out with the nigerian fruit
bat is not normal so you probably don't have to 00:01:40.539 --> [endTime] worry about contracting ebola Ooh
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