The PE Index No One Wants To Look At

Investors have a tendency to pay too much when things are going well, and sell for too little when the market struggles, so it’s useful to have an idea of how much sentiment is currently built into stock prices. That’s why Citi has been using its Panic/Euphoria index since 2002 to measure sentiment using an array of sometimes contradictory factors. The current level of euphoria implies an 80% chance of a market downturn in the next year, small caps have the highest valuations relative to large caps in 35 years, and Federal Reserve Chair Janet Yellen’s comment that rates might increase six months sooner than expected sent barely a tremor through...