Though we have come to look a little askance at the seemingly ubiquitous CAPE measure – not least because of its gratingly unnuanced adoption by the Permabears – we can still utilise it to derive some broad sense of the market’s status once we attempt to adjust it for what we see as two of its bigger flaws: the seemingly arbitrary nature of the 10-year calculation period and its lack of regard for the effect of those wider asset valuations being expressed in the bond market that we have just touched on above.
Though such adjustments do mitigate some of the implied over-valuation of equities, they are hardly enough to remove it. Add in the climb in bond yields and the fall in the dollar and another intriguing possibility drops out – that the relative reversal seen vis-a-vis commodities which started before the Tech Bubble peak might be playing out once more.
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