Value in Selecting Sectors: Sector rotation strategy based on the Shiller CAPE ratio

Each year there are significant differences between the performance of the best sector and the worst, making it more attractive to invest in the former rather than the latter.

To try identifying potential market performance in advance, in 1988 US economist professor Robert Shiller introduced a valuation metric called CAPE® ratio – Cyclically Adjusted Price Earnings – a ratio of the current value of a portfolio to inflation-adjusted aggregated earnings of its constituents averaged over a sufficiently long period of time to remove the effects of business cycles. Shiller showed that for the S&P 500 index since the 1880s, high CAPE® ratios tended to indicate weak market performance in subsequent years.

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