CAPE and the COVID-19 Pandemic Effect

18 Pages Posted: 19 Oct 2020 Last revised: 22 Aug 2021

See all articles by Robert J. Shiller

Robert J. Shiller

Yale University - Cowles Foundation; National Bureau of Economic Research (NBER); Yale University - International Center for Finance

Laurence Black

The Index Standard

Farouk Jivraj

Barclays Investment Bank; Imperial College Business School

Date Written: October 19, 2020


Campbell & Shiller’s Cyclically-Adjusted-Price to Earnings ratio (CAPE), is well-known to characterize the strong relationship between an inflation adjusted earnings-price ratio and subsequent long-term returns, as first highlighted in their 1988 paper "stock prices, earnings and expected dividends". It has now become an often cited and followed measure of long-term equity market valuation.

In this paper, we specifically examine how the ¢ape ratio has behaved over the COVID-19 pandemic period, referred to as the pandemic for shorthand hereafter, and we also extend our analysis beyond the United States (US) equity benchmark, to also look at the CAPE ratios for the United Kingdom (UK), Europe, Japan and China, to analyse the effect of the pandemic across the major equity markets globally. We investigate the CAPE ratios of these equity markets relative to the respective long-term interest rates markets and develop a measure which may be revealing to understand the current demand for equities relative to the alternative of long-term bonds.

With the CAPE ratio now synonymous with long-term equity market valuations, its use as a tool to forecast equity market returns to form return expectations for the equities part of the portfolio is now relatively commonplace. As such, we show changes in such return expectations pre-pandemic versus current, across the regions, to highlight the impact of pandemic. An extension to this forecast was presented in Shiller (2015) where excess real returns of stocks over bonds were found to be influenced by both CAPE and real long-term interest rates, where this relationship had an R2 of 0.41. We therefore also extend the forecasts made to investigate the changes in excess real return of stocks over bonds pre-pandemic versus current, across the major equity markets to try and shed light on investors' strong preferences for equites over bonds during this pandemic.

Lastly, to dissect some of the driving forces of the respective equity markets over the pandemic, we look to sector dynamics within each respective economy. Edwards & Lazzara (2019) recently highlight the important role that sector dynamics can play in the returns of equity market country indices and as such, understanding these dynamics is especially important over the pandemic when comparing the relative performance of international markets.

Suggested Citation

Shiller, Robert J. and Black, Laurence and Jivraj, Farouk, CAPE and the COVID-19 Pandemic Effect (October 19, 2020). Available at SSRN: or

Robert J. Shiller

Yale University - Cowles Foundation ( email )

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National Bureau of Economic Research (NBER) ( email )

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Yale University - International Center for Finance ( email )

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Laurence Black

The Index Standard

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Farouk Jivraj (Contact Author)

Barclays Investment Bank ( email )

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London, Canary Wharf E14 4BB
United Kingdom

Imperial College Business School ( email )

South Kensington campus
London, SW7 2AZ
United Kingdom

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