Sloppy work by the author. He doesn’t describe his calculations well, but he wants us to believe a short-term divergence in this one measure is associated with long-term effects over a decade? A claim like that needs stronger evidence than “I ran the numbers and this was spit out”. Of note, the author of the model he is examining concludes “ A regression model that uses a small set of macroeconomic explanatory variables can help account for movements in the CAPE ratio over the past six decades. However, the model’s predicted CAPE ratios for the second and third quarters of 2020 are highly sensitive to the inclusion of a macroeconomic uncertainty index as an explanatory variable. Today’s investors appear to be reacting to macroeconomic uncertainty very differently than in the past. This result highlights the difficulty of judging whether the stock market is overvalued and makes it hard to predict how investors will react to a future episode of elevated uncertainty.”
Predicting future events with past data assumes the relationship between variables is constant over time. If it is not, the models cannot be predictive.
