Despite some wild volatility in March, it's turned out to be another phenomenal year for investors on Wall Street. Earlier this month, the time-tested Dow Jones Industrial Average (DJINDICES: ^DJI), benchmark S&P 500 (SNPINDEX: ^GSPC), and tech-driven Nasdaq Composite (NASDAQINDEX: ^IXIC) all soared to fresh all-time highs.
Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a "Double Down" signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same "Total Conviction" signal is flashing for a company 1/100th the size of Nvidia. Continue »
But even bullishness has its limits on Wall Street. The stock market is currently bordering on a dubious record dating back to the early 1870s. Should history be made, it would offer terrifying implications for Wall Street and investors.
Several predictive indicators suggest the stock market is headed toward a sizable correction or bear market, including record margin debt, an all-time low for the Michigan Consumer Sentiment Index in May, and rapidly rising inflation. But few metrics have been more time-tested or accurate than the S&P 500's Shiller Price-to-Earnings (P/E) Ratio, also known as the Cyclically Adjusted P/E Ratio (CAPE Ratio).
Valuing individual stocks and/or the broader market is difficult because there isn't a blueprint that works with all public companies or indexes. What's more, subjectivity and emotions often come into play, making it incredibly challenging to accurately predict short-term directional moves in individual stocks or major indexes.
What makes the Shiller P/E unique is its scope. Rather than accounting for only trailing 12-month earnings like the traditional P/E ratio, the Shiller P/E is based on average inflation-adjusted earnings from the previous decade. This time-tested valuation tool has been extensively back-tested, won't lose its usefulness during recessions, and provides the closest thing to an apples-to-apples valuation comparison of the broader market that investors will get.
