Valuation-Informed Indexing #440: “In an Investing World Dominated by Hype, CAPE Is a Rare Truth-Teller”

I’ve posted Entry #440 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called “In an Investing World Dominated by Hype, CAPE Is a Rare Truth-Teller.”

Juicy Excerpt: The full reality, however, is that valuations are back at the levels that brought on the 2008 crash. There are trillions of dollars of Pretend Money generating lots of artificial economic growth today. If valuations fall sharply, as they always do when they rise as high as they are today, earnings will crash and the warning being flashed by today’s CAPE number will be seen to have been a legitimate one, not an artificial one caused by events that transpired nearly 10 years ago.

The conventional view is that it is the economy that affects stock prices. But, if Shiller is right that stock prices are heavily influenced by investor emotions, it is just as much so or more so that stock prices affect the economy. If that is so, we cannot evaluate the merit of the CAPE metric by considering only the economic factors focused on by CAPE’s critics. We have to take into consideration how today’s irrational exuberance will be hurting us in days to come.