As the market reaches new highs one has to wonder if there is a correction looming or will the markets continue posting new highs as time marches on. Opinions are varied from Cal Icahn recently saying:
I am very cautious on equities today. This market could easily have a big drop.
To Warren Buffett stating:
I would say that they’re in a zone of reasonableness. Five years ago, I wrote an article for The New York Times that said they were very cheap. And every now and then, you can see that they’re very overpriced or very underpriced. Most of the time, they’re in an area where maybe they’re a little high, a little low, and nobody really knows exactly. They’re definitely not way overpriced. They’re definitely not underpriced.
Which is it? This article looks at the Shiller PE ratio both past and present in an attempt to frame possible outcomes. Data for this article was obtained here. We used the median Shiller PE’s over various points in time and compared them to the historical Shiller PE. We’ll start with a look at the yearly data:
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