Cyclically Adjusted Risk Premium (CARP)

How expensive is the market right now?

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Bargain
Inexpensive
Fair
Expensive
Ruinous
Cyclically Adjusted Risk Premium (CARP)
Indicator TypeValuation
Scale 0 - 100
Absolute Value Range -2.24 to 3.98
Historical Data Date RangeJan 2, 1992 - May 17, 2024
Last UpdatedMay 17, 2024 7:58 PM EST
Historical Data
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Indicator Description

The Cyclically Adjusted Risk Premium (CARP), first described here by Georg Vrba, is a financial indicator designed to provide investors with a nuanced perspective on market valuations by integrating the renowned Shiller CAPE (Cyclically Adjusted Price-to-Earnings) ratio with the crucial element of bond yields. CARP encapsulates a comprehensive view of the market's attractiveness by assessing the relative appeal of stocks compared to bonds.

Formula: 100 / CAPE - 10Y Treasury yield

Since 1992, the CARP has ranged between -2.24 and 3.98 with a mean of -0.52 and a median of -0.57. Higher absolute CARP values are indicative of cheaper equities. However, for ease of comparison, we've scaled CARP values from 0 to 100 with higher scaled values indicating lower absolute CARP (more expensive stocks).

The Shiller CAPE has long been a staple in market analysis, providing a cyclically adjusted measure of stock valuations by considering earnings over a 10-year period. By incorporating this metric into CARP, investors gain a more nuanced understanding of the historical earnings yield of the market, offering a perspective beyond conventional price-to-earnings ratios.

What sets CARP apart is its incorporation of the 10-year Treasury yield, a key benchmark for risk-free returns in the market. By subtracting the prevailing Treasury yield from the Shiller earnings yield, CARP quantifies the risk premium associated with holding stocks over bonds. This dynamic element ensures that CARP reflects the prevailing interest rate environment, providing a real-time assessment of the trade-off between risk and reward.

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