Tobin’s Q Versus CAPE Versus CAPER: Predicting Stock Market Returns Using Fundamentals and Momentum
24 Pages Posted: 21 Mar 2011 Last revised: 12 May 2011
Date Written: March 13, 2011
This paper predicts the performance of the stock market using Tobin’s q, momentum, the Campbell-Shiller CAPE, and a new variant of the CAPE, the CAPER, which is trend earnings calculated using regressions of log earnings on time. Generally, the CAPER is superior to the CAPE. But q emerges as by far the most important of the three predictors. Two versions of the model are built. The one with momentum predicts a 18% fall in real wealth over the four years from the end of 2010 from investing in the S&P 500 index. The one without momentum predicts wealth to increase, but even after fourteen years, only a 17% increase in real wealth.
Keywords: CAPE, CAPER, Tobin’s q, momentum, stock market
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