Macro Hive has previously discussed why the Shiller’s CAPE ratio might need a re-visit given its 10-year trail no longer picks up the crisis drop in earnings. We readdress the topic with this piece, where Ben Carlson points that the ratio has been hovering above 30x since 2017, something which only happened twice before (1929 and 2000) – and both times it preceded huge market crashes. However, with continued low interest rates and non-existent inflation, he claims the high market valuation today is justified and stable. Carlson also warns against the universal use of high valuations as a crisis timing tool, since this has proved unreliable in the past.
Why does this matter? As difficult it is to decide whether a new recession is approaching, we agree that it’s worth keeping in mind that high market valuations aren’t a diagnosis for a crash.
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