The risk of estimating risk

The US stock market has defied the odds this year.
  • 27 December 2017

The US stock market has defied the odds this year, or so it appears, by running hotter and staying calmer for longer than expected, based on a variety of risk metrics. It’s unclear if this is due to a failure of the risk metrics, irrational exuberance run amuck, or both.

The CAPE ratio for instance – a measure of the market’s valuation – has been elevated in recent history, rising to the second-highest level since the early 1930s. History suggests that the S&P 500’s expected return is low, perhaps negative, when CAPE is high.

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