According to the cyclically adjusted price earnings ratio (CAPE) developed by Yale professor Robert Shiller, stocks are trading at a CAPE of 29.4. This is below the October 1929 peak of just above 30, and the dot-com surge that pushed stocks up to 44.2. (Source)The mean and median of this metric come between 16-17.By contrast, here’s an image of standard P/E ratios plotted from the 1870’s forward:Without going further, what exactly is this CAPE ratio and why is it used instead of standard P/E?Many investors take P/E ratios with a grain of salt, given there is a degree of noise in earnings over the trailing twelve months (“TTM”).CAPE is different in that it takes a moving average of the past ten years’ earnings and uses that figure in lieu of the standard TTM formula. Under this theory, earnings taken over ten years should smooth out the volatility inherent in a one-year earnings reading and better approximate future returns once the “true” earnings potential is better understood.CAPE is not meant to be a “market crash predictor” although it’s been rare for this ratio to last above 25 for extended periods of time. When tested against the entirety of the market’s history dating back to the early 1880’s, the CAPE ratio has only held above 25 less than 10% of the time.Today’s market would need to ascend another 50% to get to peak dot-com levels.TakeawayCAPE is just one among many tools to put the market in perspective relative to historical performance.The main flaw in the CAPE includes the fact that it’s backward-looking (past ten years of earnings history). Moreover, P/E ratios should naturally be higher under the central bank policies currently running in developing nations, with ultra-low rates and leveraged central bank balance sheets. This has made low-risk instruments, such as sovereign bonds, unattractive as investment items, pushing funds into higher-risk asset classes like stocks and real estate. Therefore, earnings should trade at higher multiples.Accordingly, we can say that stocks are not as overbought as they were in 1929 (when interest rates were close to 10%) and not as overbought as they were in early 2000 when valuations of tech/internet startups were still difficult for investors to figure out.Although stock valuations today don’t seem to be supported by traditional value-based arguments, unless a catalyst pops up soon – adverse credit-related event or skepticism on tax reform, infrastructure spending, or other expansionary fiscal initiatives – valuations are probably likely to hold or even continue with the trend.