Monetary Policy Adjusted PE Ratio Offered to Investors, Improves Traditional CAPE Accuracy

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P/E for market valuation is affected by interest rates, inflation. The Wall Street Challenger has introduced the Monetary-Adjusted Price-Earnings ratio; it improves traditional P/E accuracy in signaling market tops or bottoms as a result of expected monetary policy effects.

Monetary policy has an effect on asset class valuations

Is it time to worry about another stock market bubble? With the SPX index hovering near an all-time high, it’s controversial whether stocks are over-valued. The Wall Street Challenger introduces MAPE, Monetary-Adjusted Price-Earnings ratio, built off of Shiller's widely accepted CAPE algorithm and improves traditional P/E accuracy in signaling market tops or bottoms as a result of expected monetary policy effects.

Two divisions formed, the Shillerites and non-Shillerites, arguing over CAPE's ability to take into account the effect of interest rates; especially the post 2008 monetary policy shift that influenced several movements in interest rates. MAPE is constructed by amending Shiller's CAPE with three variables: inflation, long-term interest rate shifts, and Trade-Weighted U.S. Dollar index. MAPE's intent is to correct the CAPE's valuation affected by monetary policy.

CAPE is at elevated levels, although not at the highest historical overvaluation. The comparison between the MAPE-CAPE illustrates the P/E valuation divergence subject to the monetary policy shift. Moreover, the divergence between CAPE and MAPE ratios is at unprecedented levels and it reveals central bank policies' direct effect on prices. Valuations between 2004 till 2006 compared to 2010 to present represents these concerns.

To find out more about market valuation or MAPE, visit http://thewallstreetchallenger.com/Index/valuation.html

The Wall Street Challenger is a prominent organization for global investment research. It is dedicated to provide original, impactful economies views, markets forecast, strategies and analysis to identify investment opportunities.

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Gigel Marinescu
@GigelMarinescu
since: 08/2009
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