My professional risk management colleagues and central bankers are getting a bit nervous when other people ask them for advice on how to get more exposure in the stock market, or, for that matter, on how to buy houses or enter Bitcoin. Some of them are wary, others are positive and fearless. Over the last weeks, we have observed some inflation and interest-rate-related jitters in the stock market. What does this say about stock market valuation and interest rates?

The viewpoint of Robert Shiller is especially noticeable in this respect. The professor and Nobel Laureate, who more the less coined the concept of irrational exuberance, is now writing about ‘Making Sense of Sky-High Stock Markets’. Back in 1996, Shiller introduced the CAPE ratio, an acronym for Cyclically Adjusted Price-to-Earnings ratio, which is also known as the Shiller P/E ratio.

This ratio has regularly been used by market practitioners in asset management. At the moment, the CAPE ratio is sky-high, and thus, the market looks expensive. However, according to Shiller this is no reason to worry. He explains the high stock market valuations as being the result of the low-interest rates. For this reason, he introduced a measure that also takes into account long interest rates, Excess Cape Yield or ‘ECY’.