With the debate about the valuation of the US stock market continuing to rage, one factor which is often overlooked is the importance of choosing the correct long-term average with which to compare its current level. When it comes to Shiller’s well-known cyclically-adjusted price/earnings ratio, the correct answer is the harmonic average, not the arithmetic average. Esoteric as this may sound, it actually makes quite a big difference when comes to gauging the extent of the market’s overvaluation.
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