C (3:16)

So there are dozens of ways to slice and dice the market and to value it. But, but this is really the gold standard. It was first proposed, actually way before Robert Shiller made it popular, by Benjamin Graham, who's the mentor of Warren Buffett, who said, you know, I think you should just look back and you should look through an entire business cycle and adjust for inflation because that will really fairly tell you what companies have earned and then it tells you where you are. Whereas what you commonly hear is the market's PE ratio is X, which is just looking at what analysts are forecasting for the next year, which is A is frequently too optimistic and B is just looking at a single year. You know, profit margins rise and fall, recessions happen, inflation happens. And so this normalizes for all that. And it's proven to be an extremely reliable indicator of what to expect in the several years ahead of us.

B (4:08)

You're right. This is only the second time it broke above 40. How significant is that?

C (4:13)

One of the criticisms of this measure is that people will look back at the entire history of it and we have a history going back to 1881 and say, okay, yeah, the long run average of this measure is 17. We're at 40. Oh my God. And you have to recognize that that's not fair because in 1881, the US was like an emerging market. Now go back to 1990, you had CNBC, you had computers, and the average is a much higher 27. We're way above that. There's definitely a very, very clear relationship between how high the Shiller PE is and how low your expected returns are. And the market is extremely expensive. It's in about the 1 or 2% range of being most expensive in history. As far back as we have numbers.

B (5:01)

You mentioned a model from Index Developer Research Affiliates that suggests some types of companies could have better returns based on these cyclically adjusted PE ratios. What are they predicting?

C (5:12)

What it's telling you is that you really would benefit from diversifying away from the things that have done very, very well, which are these large US companies like Nvidia and Microsoft, the MA7 and other tech companies in their orbit that really have produced the lion's share of returns in the last 10 years.

B (5:31)

That was the Wall Street Journal. Spencer. Jacob Spencer, thank you.

C (5:34)

Thank you.

B (5:35)

And a note of caution is creeping into markets after a months long run. Higher finance executives at a summit in Hong Kong today warned that the winning streak has made stocks vulnerable to a pullback. The Nasdaq led declines, dropping 2%. The S&P fell more than 1%, while the Dow was off by about half a percent. One company that bucked the trend was Yum Brands. The restaurant chain owner's shares gained 7.3% after it said it was considering selling its Pizza Hut business. Coming up, the government shutdown is poised to break the record for the longest funding lapse in U.S. history tonight. But could the end be near? That's after the break. Hi, this is Gunjan Banerjee and this is Telus Demos. We're reporters at the Wall Street Journal and The hosts of WSJ's take on the Week.

D (6:28)

Take on the Week is a weekly show that gives listeners a leg up in the world of markets and investing.

B (6:33)

From the Fed's moves to market bubbles, we dive into the biggest deals, key players and business news ahead.

D (6:39)

If you're looking for more news and tools that can help you navigate the markets, consider becoming a subscriber to the Wall street journal.

B (6:45)

Visit subscribe.WSJ.com takeontheweek to subscribe now, as you've heard from us, today is Election Day in the US with races for governor in New Jersey and Virginia, a mayoral election in New York City, and a ballot measure in California that would redraw the state's congressional maps to benefit Democrats. The outcomes could offer insight on how Americans feel about President Trump's second administration and whether Democrats can capitalize on voter dissatisfaction. To follow the races and hear from voters, go to our live blog coverage@WSJ.com the government shutdown is on track to break the record tonight for the longest funding freeze in US History. But a breakthrough might be on the horizon. Lawmakers in Washington said they're increasingly optimistic that they can reach a bipartisan deal to end the shutdown that began on October 1st. Hundreds of thousands of federal workers have been furloughed because of the funding lapse, while air traffic controllers and other government employees are working without paying. The shutdown has also disrupted snap food aid for Tens of millions of Americans. Katie Stetch Farig covers Congress for the Wall Street Journal and has the latest. Katie, we are on day 35 of the shutdown. There's been a lot of focus on the lapse in food aid and delays at airports. Do you think we've reached a tipping point? Where do negotiations stand?

D (8:08)

Yeah, for all the pressures that you just described, we're seeing that weigh on lawmakers heavily here on Capitol Hill. We're also seeing optimism that we haven't seen before. Last week we saw discussions here and there between senators talking about different dates, different scenarios by which the government could set a new deadline for government funding and come together with a vote that would incorporate some of the demands from Democrats we have on health care related funding. I hate to use the term cautiously optimistic, but that's where we are right now.

B (8:38)

The optimism you talk about seems to mostly be coming from the Senate. What about House Republicans?

D (8:44)

Any deal that is struck on the Senate side will also need approval from the House. We did hear Hakeem Jeffries say earlier today that of course they're watching any Senate side developments and open to seeing any bipartisan deal. But that does not take into account Speaker Johnson's position. He's in a tough spot because some Republicans in his conference are supportive of these subsidies that Democrats have made a condition of reopening the government. But he also has a very strong conservative anti spending flank that would oppose any sort of extension. On the Senate side, we are seeing some moderate Democrats say, hey, I trust my Republican colleagues, but when it comes to Johnson, I'm just not sure I trust him and I don't know what he would do with it.

B (9:27)

And President Trump is putting more pressure on Republicans to bypass Democrats and end the impasse without their votes. Where is he in all this?

D (9:36)

We've seen twice in the last week. Now President Trump take to social media and pressure Republican colleagues to bypass Democrats and the filibuster to restart the federal government. We've been talking to Republican senators for the last couple of days now, some of whom remain very uncomfortable with that scenario. But we do expect Trump to ramp up that pressure, especially if he doesn't see any progress in the next couple of days.

B (10:01)

That was the Wall Street Journal's Katie Stetschferick. Thank you, Katie.

D (10:04)

Thanks for having me.

B (10:08)

And finally, we did exactly what needed to be done in order to catch those who were guilty on 911 and to prevent a further attack. And we were successful on both parts. That was former Vice President Dick Cheney. He was defending the George W. Bush administration's approach to the war on terror after 911 on Fox News in 2014. Cheney, one of the most powerful vice presidents in U.S. history, died yesterday of complications of pneumonia and cardiac and vascular disease. He was 84. Cheney was a national security hawk who served four Republican presidents. He advocated for the US invasion of Iraq in 2003 and defended it long after he left office, even as many Americans came to view the war as a strategic and humanitarian disaster. After he left office, he was a leading conservative critic of the Obama administration and then became a critic of Donald Trump, endorsing Democrat Kamala Harris for president in 2024. And that's what's NEWS for this Tuesday afternoon. In case you missed it, heads up that we dropped a new episode of what's NEWS in Earnings earlier today. We're looking at Big Pharma, the competition over weight loss treatments and how drug makers are dealing with the Trump administration on drug prices and tariffs. That's in the feed now. As for today's show, it was produced by Pierre Bienname and Zoe Culkin with supervising producer Talia. I'm Sabrina Siddiqui for the Wall Street Journal. We'll be back with a new show tomorrow morning.

D (11:32)

Thanks for listening.