Ben Carlson, Columnist

What to Make of These Twice-in-History S&P 500 Valuations

Rein in your expectations for returns over the next decade or so.

March 3, 2017 at 10:00 AM UTC

Ben Carlson is director of institutional asset management at Ritholtz Wealth Management. He is the author of "Organizational Alpha: How to Add Value in Institutional Asset Management."

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Something happened in the stock market this week that has only occurred twice since 1871: Robert Shiller’s favorite valuation method for the S&P 500, the cyclically adjusted price-to-earnings ratio, reached 30. So, is it time to worry?

Let’s start with the bad news. The two times the CAPE ratio reached these levels, doom followed in the stock market. In 1929, it only stayed above 30 for about two months until Black Tuesday sparked a crash that sent stocks tumbling more than 80 percent from their peak. It happened again in mid-1997, but stocks and valuations continued to rise. The ratio eventually rose above 44 in late-1999 and stocks ran up almost 85 percent before eventually losing half their value by 2002 after the technology bubble burst.