CAPE and the COVID-19 Pandemic Effect

Campbell & Shiller's cyclically-adjusted-price to earnings ratio (CAPE) is well-known to characterise the strong relationship between an inflation adjusted earnings-price ration and subsequent long-term returns. It is often followed as the measure of long-term equity market valuation.

This paper will specifically examine how the CAPE ratio has behaved over the COVID-19 pandemic period, extending the analysis beyond the United States equity benchmark to look at the CAPE ratios for the UK, Europe, Japan and China, to analyse the effect of the pandemic across the major equity markets globally. The investigation will look at 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 long-term bonds.