The Analyst’s Course · Macro Regimes
Using CAPE Without Wrecking a Portfolio
The tilt framework
Instead of binary in/out, scale exposure with the percentile: at CAPE medians, hold target equity; above the 80th percentile, cap new equity contributions; above the 95th, tilt equity down meaningfully (say 70–80% of target) while rebalancing rules stay mechanical. This respects the decade-scale signal (risk budget genuinely should shrink at extremes) while acknowledging the 1996 problem (earliness is the price of admission). Backtests of tilt rules show better risk-adjusted outcomes than full exits, at the cost of trailing raging bull markets — that trade is the strategy.
What to do with the savings
A tilt that raises cash creates its own problem: cash drag. Practitioners recycle it — into less-extended assets (international value when US growth is expensive; shorter duration when curves are flat; quality-factor exposure when breadth narrows). The macro panel gives the regime context for which recycling is reasonable; the discipline is that the tilt's proceeds have a job, not a parking spot.
The composition caveat
CAPE is an index-level average, and averages hide concentration. In 1999 the index's CAPE was inflated by a tech minority while the median stock was far cheaper; in 2026, the top ten mega-caps dominate the index's earnings base and its CAPE alike. The signal's meaning at index level ("broad expensive") is weaker when dispersion is extreme — which is why the tilt pairs naturally with the SQL screener (Track D): find what the average is hiding.
equity target × f(CAPE percentile): 1.0 below p80 · 0.9 p80–95 · 0.75 above p95
Tilt rule (example) — Mechanical, decade-aware, and survivable — the rules matter less than having them before the extreme arrives.
2017–2021: the tilt's tuition
A p95 tilt initiated in 2017 underperformed a fully-invested benchmark through 2019 (two banner years), got repaid violently in Q1-2020 and again in 2022, and finished the five years ahead on a risk-adjusted basis — while trailing on absolute returns. Every decade this tuition gets paid again; the investors who keep the discipline are the ones who priced the tuition in advance, in writing.
What you'll practise
The core practice change a high CAPE should drive is…
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.