# A New Stock Market Valuation Measure with Applications to Retirement Planning

## TL;DR

This paper introduces a new stock market valuation measure derived from a generalized cyclically adjusted price-earnings ratio, challenging efficient market theory and providing insights for retirement planning.

## Contribution

It generalizes the CAPE ratio by modeling earnings and wealth dynamics, offering a novel valuation metric and implications for long-term return predictions.

## Key findings

- Disproves the Efficient Market Hypothesis.
- Long-run total returns equal earnings growth plus 4.6%.
- Provides a framework for retirement withdrawal strategies.

## Abstract

We generalize the classic Shiller cyclically adjusted price-earnings ratio (CAPE) used for prediction of future total returns of the stock market. We treat earnings growth as exogenous. The difference between log wealth and log earnings is modeled as an autoregression of order 1 with linear trend 4.6% and Gaussian innovations. Detrending gives us a new valuation measure. Our results disprove the Efficient Market Hypothesis. Therefore, long-run total returns equal long-run earnings growth plus 4.6%. We apply results to retirement planning. A withdrawal process governs how a retired capital owner withdraws a certain fraction of wealth annually. We study the long-term behavior of such processes.