Implications of the Current Shiller P/E Ratio

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This article expands on ideas presented in a previous article, “Return Distributions and the Shiller P/E Ratio.”  Here we study the historical behavior of U.S. stocks during three-year holding periods that began at with valuations comparable to recent market conditions, as measured by the Shiller P/E ratio.

A recent article of Keith’s, Return Distributions and the Shiller P/E Ratio, received numerous responses from readers, many of whom asked, “What is the Shiller P/E ratio today, and what does it imply for the stock market?”  Together, we endeavored to answer that question by measuring the historical distribution of three-year returns for stocks when the beginning valuation level for the market was comparable to current conditions.

According to Shiller’s web site, stocks ended the month of February with a Shiller P/E of 20.01, placing the market’s recent valuation within the most expensive quartile of its historical range dating back to 1884.  Since the “most expensive quartile” constitutes a wide range of valuations – 19 to 44 for the Shiller P/E – we decided to narrow the focus of the study to periods for which the beginning Shiller P/E fell between 18.00 and 22.00, within two points of the current value.  This range captures approximately 18% of all monthly observations since 1884, and might be considered “expensive” in the context of the metric’s history, but not extraordinarily so.  

U.S Stock Market*
1884 – 2009
Rolling 3-Year Holding Periods
1,512 Monthly Observations

When the beginning Shiller P/E is…
18.0-22.0 Entire History
Average 3-Year Return (annualized)
Median 3-Year Return (annualized)
% of Periods with Negative Return
Best 3-Year Return (total)
Worst 3-Year Return (total)

*U.S. stock market returns for the period 1884 through 1926 are derived from the Shiller market index here.  Returns from 1926 through 1969 represent the “Large Company Stocks” category from Ibbotson Associates.  Returns from 1970 onward represent the S&P 500 Index.

Sources: Robert J. Shiller, Standard & Poor’s; Ibbotson Associates; Capital Advisors, Inc.