The first advantage the CAPE ratio has over its shorter-term counterpart, the PE ratio, is that it is much less volatile as it uses long term average earnings. The second is that as it uses long term earnings that represent real business performance. In other words, the CAPE shows when a market is cheap or expensive from a value perspective. When earnings decline in a recession, the standard PE ratio spikes while the CAPE ratio declines alongside lower stock prices as it takes much more time than a recession for average earnings to decline.
