It may be time to take a look at the cyclically adjusted price-earnings (CAPE) ratio, Campbell and Shiller (1998) to help gauge whether the stock market is overvalued. Two of the three inputs interest rates and potential growth rates, can be guessed. The third input, macroeconomic uncertainty is where investors may be caught.
Investors have approached the 2020 market with total certainty:
- The market knows the problem is simply COVID
- The President says it is basically a bad case of the flu.
- A vaccine that works will be ready at any moment.
- Everyone will take the vaccine.
- Everything will go back to normal soon.