Is the market too high? That depends on what you mean. The average P/E of S&P 500 stocks is near 25, where it has essentially been hovering for two years. The Shiller P/E, on the other hand, is 30.30, which is just above where it was on the eve of the 1929 stock market crash, although still well below its highest level ever, near 44, which it hit in the final weeks of 1999. The difference between the two is that instead of examining price to current earnings, the Shiller P/E examines price to average earnings over the last five years.
So what does it mean that the Shiller P/E is higher than the standard average P/E? In this case, it means that corporate earnings have been rising fairly rapidly over the last five years. That makes the current market seem fairly dangerous, because we could be in both a price bubble and an earnings bubble simultaneously, and either, by popping, would likely pop the other as well, putting synergistic downward pressure on the market.
Is double-bubble day just around the corner? It really doesn’t seem so, for two reasons. First, current market prices are remaining essentially rational compared to their level back in the late 1990s, and second, the economy, while growing only slowly, doesn’t appear to be in any danger of going into recession, in fact, current indications are that it is strengthening. So while there is good news for the market in general, things could be getting very bad for companies that don’t meet the market’s lofty earnings expectations, and I’d be particularly worried about holding on to the companies on today’s list.