The S&P 500 Index reached a record high in September, extending the longest bull market in history and generating an inflation-adjusted return of 300 percent since March 2009. The rally drove price-to-earnings ratios above 33, to levels only matched at the height of the dot-com bubble. The S&P 500 is now down 15 percent from its September high, reducing the P/E ratio to 28.
So what does history suggest might happen in 2019? On average, the outlook is not good when stocks are falling, but still expensive. The table below shows that historically, investors have done best when buying at P/E ratios below 10 and worst when buying in the 27 percent of months with P/E ratios above 20. (The data come courtesy of Yale University Professor Robert Shiller, whose cyclically adjusted price/earnings ratio, or CAPE, is the best generally available information.)