From these data, I created a Valuation Confidence Index, which is the percent of respondents who think the domestic stock market is not overvalued; a Crash Confidence Index, which is the percent who think<br />that a 1929- or 1987-style crash in the next six months is highly unlikely; and a One-Year Confidence Index, which is the percent who think the stock market will go up in the next year.<br />The CAPE ratio has successfully explained about a third of the variation in real 10-year stock market returns in United States history since 1881.<br />The high fraction of our survey respondents who think<br />that the stock market is unlikely to fall in the next year may simply reflect a failure of imagination about how a Trump bull market could suddenly end.<br />The current level of CAPE suggests a dim outlook for the American stock market over the next 10 years or so,<br />but it does not tell us for sure nor does it say when to expect a decline.<br />In years when CAPE was lower than that, subsequent 10-year returns for the stock market tended to be good.<br />In 1988, John Y. Campbell (now at Harvard) and I showed in a joint article<br />that such a ratio has, since 1881, forecast returns somewhat well in the stock market.<br />But in both cases, during the initial election campaigns the economy was in recession<br />and the CAPE ratio was extremely low — around 5 in 1920 and 9 in 1980.<br />One possible interpretation might be that respondents perceive a stock market bubble: They think valuations are high<br />and there is a non-negligible probability of a crash.<br />This is a bit technical: It is real, or inflation-adjusted, stock price divided by a 10-year average of real earnings.
