Don’t be so sure about CAPE fears

Well look what we have here. A market post-taper announcement that has not completely collapsed. In fact, it appears that maybe more taper had been priced in than we received (if it had been priced in at all). The market jumped significantly higher after Bernanke started the QE-Exit party while keeping forward guidance dovish. Today we have a market that has essentially done nothing in the face of a high reading on initial unemployment claims. Yields on the 10-yr Treasury are up slightly but will likely face some hesitation once testing the 3% level. If we break that level switfly, 3.5% may not be too far away. 

Around the industry the bears keep on pointing to CAPE as their super hero in disguise. However, what happens when a bear’s strongest piece of ammunition (CAPE) is suddenly revealed as not being completely “honest” over the course of history? This is exactly what has covered in their recent article “When a Good Indicator Goes Bad“. Morningstar claims that once CAPE is adjusted for modern goodwill accounting methods, valuations aren’t so ridiculous in the market. This is illustrated here:

Perhaps bears should find another method to prove the sky is about to fall. Until then, their silver bullet has turned to aluminum. 



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