Shiller PE vs. TTM PE

Attribute	Shiller PE	TTM PE
Calculation	Based on average inflation-adjusted earnings from the previous 10 years	Based on earnings from the most recent 12 months
Volatility	Less volatile due to smoothing effect of 10-year average	More volatile as it reflects only recent earnings
Historical Perspective	Provides a long-term view of market valuation	Provides a snapshot of current market valuation
Usefulness	Useful for assessing market valuation over longer periods	Useful for quick assessment of current market valuation

Introduction

When it comes to evaluating the valuation of a stock or the overall market, two commonly used metrics are the Shiller PE (also known as the cyclically adjusted price-to-earnings ratio) and the TTM PE (trailing twelve months price-to-earnings ratio). Both of these metrics provide insights into how expensive or cheap a stock or market is relative to its earnings. In this article, we will compare the attributes of Shiller PE and TTM PE to understand their differences and similarities.

Definition

The Shiller PE, named after Nobel laureate Robert Shiller, is calculated by dividing the current price of a stock or market index by the average inflation-adjusted earnings over the past 10 years. This metric is designed to smooth out the impact of economic cycles and provide a more long-term view of valuation. On the other hand, the TTM PE is calculated by dividing the current price of a stock by its earnings per share over the trailing twelve months. This metric provides a snapshot of the stock's valuation based on its most recent earnings performance.

Historical Perspective

One of the key differences between Shiller PE and TTM PE is their historical perspective. The Shiller PE takes into account earnings over a 10-year period, which can help investors assess valuation in the context of long-term economic cycles. This can be particularly useful during periods of economic uncertainty or market volatility. In contrast, the TTM PE focuses on the most recent earnings data, providing a more immediate assessment of valuation. This can be beneficial for investors looking for a more current view of a stock's price relative to its earnings.

Volatility

Another important factor to consider when comparing Shiller PE and TTM PE is volatility. The Shiller PE's use of average earnings over a 10-year period helps smooth out short-term fluctuations in earnings, resulting in a more stable valuation metric. This can be advantageous for investors looking for a more consistent measure of valuation over time. On the other hand, the TTM PE can be more volatile as it is based on the most recent earnings data, which can be subject to fluctuations due to seasonal factors or one-time events.

Market Timing

Both Shiller PE and TTM PE can be used as tools for market timing, but they have different implications. The Shiller PE is often used by investors to assess whether the market is overvalued or undervalued relative to historical norms. A high Shiller PE ratio may indicate that the market is overvalued and due for a correction, while a low ratio may suggest that the market is undervalued. In contrast, the TTM PE can provide more immediate signals for individual stocks, helping investors identify opportunities for buying or selling based on recent earnings performance.

Long-Term vs. Short-Term Perspective

One of the key distinctions between Shiller PE and TTM PE is their focus on long-term versus short-term perspectives. The Shiller PE's use of average earnings over a 10-year period provides a more comprehensive view of valuation, taking into account economic cycles and trends. This can be beneficial for investors with a long-term investment horizon who are looking for a more stable measure of valuation. On the other hand, the TTM PE's focus on the most recent earnings data caters to investors with a shorter-term perspective who are more interested in immediate valuation signals.

Conclusion

In conclusion, both Shiller PE and TTM PE are valuable tools for evaluating the valuation of stocks and markets. While the Shiller PE offers a long-term perspective that smooths out volatility and provides insights into historical valuation trends, the TTM PE provides a more immediate assessment based on recent earnings data. Investors can benefit from using both metrics in conjunction to gain a comprehensive understanding of valuation and make informed investment decisions.