The Shiller P/E Ratio Reaches 30, Signaling a Coming Bear Market
It was a miracle.
A wide, blue Glacier Water machine stood stark against Publix’s entrance. Words like “great tasting,” “refreshing” and “crisp” were emblazoned on the oasis.
I was excited. It was two days before Hurricane Irma was set to hurtle into South Florida. And while I thought I had enough water at home … hey, it didn’t hurt to get a little more. Plus, there was no line.
I rushed toward the machine … but suddenly a shoulder brushed past me. “Move it, girl.”
Shocked, I realized a man in a motorized scooter had just cut me off from the water. As I watched, he poked the controls for a bit. When that didn’t work, he stood up and kicked the machine a few times. Finally, he picked a flyer off the ground that said: “Out of order.”
I’ve never seen a face get so red. Fortunately, I had plenty of water at home, so I walked past him without another glance.
Honestly, being prepared felt good. I wasn’t running around Publix snatching crackers from almost-barren shelves. I wasn’t kicking inanimate objects. I wasn’t panicking.
I was ready.
And it’s an idea, I’ve realized, that easily applies to investments right now.
See, many believe the end of this lengthy bull market is nigh, and we need to be prepared for it. Their argument: What goes up must come down eventually. Stocks rarely rally forever — and they’re already gasping at oxygen-deprived valuations.
How can we tell?
Well, you can use the traditional Shiller Price-to-Earnings (P/E) Ratio. This metric, developed in 1988, uses inflation-adjusted earnings over the past 10 years to smooth out business cycles and corporate earnings that can swing wildly each year.
The Shiller P/E is currently around 30. This is big.
The ratio is typically in the midteens — so we’re about 80% higher than the historical mean. The only times we have seen more expensive equities were in 1929 and 1999 … right before two of the most destructive crashes in history.
In the 1929 crash, the Dow dropped 25% in just four days. It lost $30 billion in market value, the equivalent of $396 billion today. It only bottomed out in 1932, a 90% drop from its 1929 highs.
In the 2000 dot-com crash, stocks lost 10% of their value after a few weeks … and then the panic selling started. In the end, the Nasdaq Composite lost 78% of its value, the majority of dot-com companies had folded … and trillions of dollars of investment capital were lost.
Now, I’m not saying we’re geared to repeat those crashes. The Shiller P/E ratio is just one metric for analyzing the market.
But it’s a long-standing one that has proven itself. So it’s easy to understand why bears see this is as our “hurricane warning.” It’s signaling a storm is geared to hit … and that we better be prepared.
Even if you’re not convinced we’re reaching a top, isn’t it worth it to have a disaster plan in place?
When I thought the media was overhyping Hurricane Irma, I still got my supplies ready. After all, you want to be prepared for the worst, but hope for the best.
That’s just being smart.
For hurricanes, that means getting water, bread, flashlights … the whole nine yards. For crashes, it means finding a steady system that will let you navigate the chaos stress-free, comforted in the knowledge that you have a plan that will not only help you survive a bear market — but even prosper.
So I urge you to do your homework. Find a system that’s proven itself — particularly through crashes (such as the Automatic Profits Alert strategy). Follow an analyst you trust.
An easy way to do that is by attending an investment conference that gathers expert analysts and financial planners from around the world.
It simply pays to listen to different experts discuss their market views.
Then you can decide on the one who fits your investment needs. In the end, you want to be able to sleep soundly at night knowing your wealth is safe and set to grow no matter what storm the market throws your way.
Catch you next week.
Managing Editor, Banyan Hill Publishing