Robert Shiller’s two stock indices tell completely different valuation stories. This is why.

The argument that stocks are overvalued is often based on one index: the cyclically-adjusted price-to-earnings ratio popularized by Yale professor and Nobel laureate Robert Shiller. The index uses gains from the past decade rather than a single year to provide a long-term perspective. The July 37.98 level is more than double the average and the highest since the dotcom bubble.

The traditional cyclically adjusted price-earnings ratio.

Robert Shiller’s website

But Shiller itself has moved on to a different measure, the excess CAPE yield, which takes into account both stock valuation and interest rates. It is defined as the difference between the inverted CAPE ratio and the 10-year inflation-adjusted interest rate.

Adam Slater, chief economist at Oxford Economics, used the excess CAPE return model to see what’s going on right now. As the chart shows – and remember, as we look at returns, low numbers imply higher valuations – current valuations are not outrageous.

Slater says Oxford’s real-value models for government bonds suggest yields between 20 and 100 basis points are expensive. He writes that there is “a fundamental problem with the low interest argument — that we can compare one overvalued asset class to another.”

Much has now been done about what could cause interest rates to rise, but hot inflation rates lasting longer than the Federal Reserve expects would be the likely catalyst.

Put another way, if real interest rates rise to where they were at the end of 2018, Shiller’s new valuation measure would move into 2007 territory – just before the global financial crisis.

The graph

One topic circulating is whether the current bull market is relatively young, or an extension of the one that started in 2009 and only ended when the coronavirus pandemic hit the west.

Using the more traditional definitions, the current market is still in its infancy, with returns more than 100% below the 62-month average bull that generates an average return of 178%, according to an analysis by Wells Fargo Investment Institute. “Barring unforeseen events such as a serious policy error, we believe that these factors [strong economic and earnings growth and low interest rates] will support higher stock prices and support the bull market rally,” said Chris Haverland, global equity strategist.

the buzz

The economic calendar includes the ADP Private Sector Payroll Report, the Institute for Supply Management Manufacturing Index and the final release of Markit’s Purchasing Managers Index for manafacturing.

Intuit’s INTU,
in talks to buy email marketing company Mailchimp for over $10 billion, Bloomberg News reported:, citing people familiar with the case.

CrowdStrike Holdings CRWD,
reported results that beat Wall Street estimates and boosted the outlook, though the cybersecurity firm traded lower in premarket action.

Cathie Wood’s Ark Invest has applied to launch a new exchange-traded fund designed to track companies’ transparency ratings.

The market

Dow Futures YM00,
rose by about 100 points as other stock benchmarks ES00,


The return on the 10-year Treasury TMUBMUSD10Y,
amounted to 1.32%. Oil futures CL.1,
were stable as the OPEC+ group raised its demand forecast ahead of a meeting.

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