Assessing Recent Stock Market Valuation with Macro Data

Lansing, Kevin J.

Journal Article

Assessing Recent Stock Market Valuation with Macro Data

Abstract: History suggests that elevated values of the cyclically adjusted price-earnings (CAPE) ratio may indicate an overvalued stock market. A valuation model that uses a small set of economic variables can help account for movements in the CAPE ratio over the past six decades. One of these variables is a macroeconomic uncertainty index. Comparing the model’s prediction for the second and third quarters of 2020 to the 2008–2009 period suggests that investors have reacted to macroeconomic uncertainty very differently during the COVID-19 outbreak than they did during the financial crisis.

Keywords: Macroeconomics; covid-19;