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The Shiller PE Ratio

by Money Hammer

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Sac à bouffe Just in time for the bear market of 2022, Money Hammer unleashes the Shiller PE Ratio upon us. The only thing more brutal than this track is the rate of inflation. The only thing fatter than the snare are the interest rates.
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Hello! I make songs and videos that use brutal heavy metal to teach basic investing and personal finance. Very often in the financial media, but especially in times of economic uncertainty, experts try to predict whether the stock market is going to crash soon. There are a lot of things they look at when doing this, but one number that is very often used is the Shiller PE Ratio or CAPE Ratio. Learn about this special example of a price to earnings ratio in this video!

My comments about Jeremy Siegel are taken from a talk I saw him give, but you can find the same information several articles by Siegel including this one: www.tandfonline.com/doi/abs/10.2469/faj.v72.n3.1

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Before I begin, a reminder that I believe a typical investor should not try to predict the future performance of the stock market, but instead should stay invested in an index ETF and constantly invest a little more at a time. But it is interesting to learn how experts analyze the stock market and attempt to predict market crashes. A number that gets discussed a lot is the Shiller PE Ratio.

A Price-to-Earnings Ratio or PE Ratio for a single stock is the current stock price divided by some measurement of the company’s earnings, usually a year of earnings calculated according to some accounting rules. Most stocks will sell at a multiple of earnings because they entitle the owner to future growth and earnings. Similar companies often have similar PE Ratios. A high PE ratio might mean a stock is over-valued and due to fall in price.


The Shiller PE Ratio is similar but is calculated for all the stocks of the S&P 500. The average of ten years of earnings is used to smooth outliers. Thus it goes by another name, the Cyclically Adjusted PE Ratio, or CAPE Ratio.

If the Shiller PE Ratio is much higher than average, many will use this to argue the market is about to crash. The Shiller PE Ratio has been higher than average for quite some time. Jeremy Siegel argues that this is caused by changes in accounting rules in the 90s and 2000s. These changes reduced the earnings used in the calculation and raised the ratio. This complicates the interpretation of the ratio.

The Shiller PE Ratio is interesting but is only one of many numbers to consider when analyzing the stock market

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released September 30, 2022
Performed, recorded, mixed, and mastered by Mark Cichra, CFA.

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