The Analyst’s Course · Macro Regimes
CAPE, Constructed
The denominator problem CAPE solves
A plain P/E on the S&P 500 is violently cyclical: in recessions the E collapses, making stocks look expensive exactly when they are cheapest (2009: the "E" was so depressed that P/E looked alarming at the generational bottom). Benjamin Graham and David Dodd proposed smoothing earnings over several years in their 1934 text; Shiller and John Campbell extended it to ten years, inflation-adjusted, in their 1988 work — the Cyclically Adjusted P/E.
The construction, exactly
CAPE = real (inflation-adjusted) index price ÷ 10-year average of real earnings. Inflation-adjusting matters: without it, the 1970s' inflation flatters and the 2010s' low inflation penalizes the ratio. The panel's data (via multpl.com, from Shiller's own series) spans 1871 to today — 1,800+ monthly observations. The distribution: mean ~17.4, median ~16.1, with extremes at 1929 (~32), 2000 (~44), 2007 (~27), and 2021 (~38–40).
Reading the current print honestly
A CAPE of ~41 (today's live reading) sits at the ~99th percentile of all history — higher than all but the very peak months of the dot-com era. The correct response is neither "sell everything" (lesson 3) nor dismissal. It is: the next decade's starting valuation offers historically poor support for returns, and this fact should shape expectations and risk budgeting — not next month's trades. What it predicts, precisely, is the subject of the next lesson.
CAPE = Real Price ÷ 10-yr avg Real Earnings
CAPE — Graham & Dodd (1934) smoothing → Shiller & Campbell (1988) formalization. Panel data: 1871–present, monthly.
2009 — the ratio's finest hour
March 2009: conventional P/E looked unremarkable because trailing earnings had collapsed; the financial press was full of "stocks can't bottom with earnings this bad." CAPE told the opposite story: dividing by the 10-year average (which still contained boom-year earnings) showed the market at ~13, below its historical mean and near generational lows. The subsequent decade returned ~13%/yr real. The smoothing that makes CAPE "slow" is exactly what let it see through a cyclical earnings trough.
What you'll practise
CAPE divides price by…
3 graded checkpoints · certification exam at the end of the track
Sources
Shiller, Irrational Exuberance (3rd ed.); Estrella & Mishkin (1996); multpl.com; US Treasury
Learn content is for education only — not individualized financial advice, a recommendation, or a solicitation to buy or sell any security. Options involve substantial risk. Examples are simplified and historical patterns never guarantee future results.