Tags: BofA | Shiller | Dow | stocks

Bank of America Questions Validity of Shiller's P-E Measure

Friday, 22 Nov 2013 04:10 PM

By Dan Weil

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The price-earnings ratio formulated by Nobel laureate economist Robert Shiller has risen to its highest level since December 2007, but Bank of America challenges its accuracy.

The bank follows 15 stock-market valuation yardsticks, and Shiller's cyclically adjusted price-earnings (CAPE) ratio represents the sole measure standing above its long-term average, The Wall Street Journal reports.

Editor's Note: ‘This Wasn’t an Accident’ — Experts Testify on Financial Meltdown

The CAPE ratio utilizes 10 years of profits to avoid short-term distortions.

But "the last 10 years capture the worst profit recession we've ever seen," Savita Subramanian, head of U.S. equity and quantitative strategy at BofA Merrill Lynch, told The Journal.

The CAPE ratio is usually a good barometer of long-term valuation, she said. But in this case it's "punitive and unrealistic."

Shiller is unbowed. The CAPE ratio's 25.2 reading as of Thursday is "a concern," he told The Journal. It indicates "you should reduce holdings a bit, that might be reasonable."

Meanwhile, stocks may continue rising, Shiller said. If the CAPE ratio hits 28.8, then we're talking bubble territory, he said. "That will be a milestone."

The ratio touched a record high of 43.8 near the end of the Internet bubble in early 2000.

Some experts are skeptical of the stock market's strength.

"Even the most bullish investor would admit that sluggish economic growth, a lackluster labor market and political discord are hardly the logical bedfellows of a stock market at new highs," Nicholas Colas, chief market strategist at ConvergEx, told the Financial Times.

The Standard & Poor's 500 Index and the Dow Jones Industrial Average scored new all-time peaks Friday.

Editor's Note: ‘This Wasn’t an Accident’ — Experts Testify on Financial Meltdown

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