CAPE ratio

A cyclically adjusted price-earnings (CAPE) ratio developed by Nobel laureate Robert Shiller. The CAPE ratio examines an entire decade of earnings, adjusted for inflation, rather than just the previous 12 months. This smooths out the erratic nature of the price-earnings (P/E) ratio by taking a longer view. Individual investors can use the CAPE ratio to help set realistic expectations for future returns. When the CAPE ratio is low (below 10), subsequent 10-year real (inflation-adjusted) returns have averaged 10.5%, with some periods delivering returns above 15.0%. Conversely, when the CAPE ratio exceeds 30, historical 10-year real returns have averaged just 2.9%, with some periods delivering barely positive or even negative real returns.