On the Performance of Cyclically Adjusted Valuation Measures

Alpha Architect

Wesley Gray, Jack Vogel

Research

18 Pages

The authors evaluate whether cyclically adjusted valuation metrics truly improve stock selection, finding that CAPE is not the strongest approach. Using data from 1973 through 2012, they argue cyclically adjusted book to market performs better, while monthly rebalancing and momentum further enhance historical results.

Key Takeaways

CA BM Wins: Cyclically adjusted book to market produced a 16.6% annualized return with a 0.64 Sharpe ratio, outperforming other cyclically adjusted valuation measures.
Monthly Rebalancing Helps: Updating portfolios monthly increased the CA BM strategy's compound annual growth rate from 16.6% to 19.3%, improving both Sharpe and Sortino ratios.
Momentum Boosts Returns: Adding a momentum screen raised the high momentum CA BM portfolio's compound annual growth rate to 21.6%, about 230 basis points above the monthly rebalanced version.
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