First let me say general market indicators are no substitute for analyzing individual securities although the difficulty in finding bargains increases as market indicators trend toward extreme overvaluations. You should always update your analysis on stock holdings to ensure they are not following any euphoria into overvalued territory; of course you should always update your analysis periodically regardless of market indicators.
I’ve seen various prognostications of how the market is extremely overvalued when compared to the historical Shiller PE. Long term averages, depending on who you are talking to, hovers around 17. Using any metric measuring historical PE’s over a very long period is a useless exercise. Why? Advances in technology especially with the advent of the internet access revolutionized trading allowing easy access to information and trading for all investors, resulting in more participation both in the USA and around the world. Applying Shiller PE’s of the early 1900’s to today be like an apple to oranges comparison which will become obvious in the examples to follow.
Ok so what is an appropriate time period? This is open for debate but the period of time for this article is based on a rolling 25 year window from the current date or the date in question. Medians are calculated over various intervals and compared to the historical Shiller PE. The first example is for current time period:
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