The Stock Market Just Did Something for the 2nd Time in 100 Years, and History Says What Comes Next
The CAPE ratio just hit a level we've only seen once before -- right before the dot-com crash. Here's why this time might (or might not) be different, and what it means for your portfolio.
Overview
The cyclically adjusted price-to-earnings (CAPE) ratio has now closed above 40 for three months running. In more than a century of stock market data, that has happened exactly one other time: the dot-com bubble that eventually saw the S&P 500 (SNPINDEX: ^GSPC) lose nearly 50% of its value from March 2000 to October 2002.
So, should you be worried?
Details
The CAPE ratio is basically a smoothed-out version of the ordinary price-to-earnings ratio (P/E), in which the price of a stock -- or the entire market -- is divided by its earnings per share (EPS). The difference is that the CAPE ratio takes the level of the S&P 500 and divides it by the average of its inflation-adjusted earnings over the previous 10 years.
Source
Originally published at www.fool.com.