Is the U.S. stock market too high?
I’ve been concerned about this issue for several months. We had a small sell-off earlier in April, but that was offset by upward spikes later in the month. So I’m still concerned, partly because I tend to focus on “investing with comfort,” the title of my latest book.

There are now at least three data-sets suggesting that the U.S. stock market has climbed to an unsustainable level:

1. The CAPE ratio: The initials stand for Cyclically Adjusted Price-Earnings ratio (inflation-adjusted price of the S&P 500 divided by a 10-year average of real earnings of S&P companies). According to the ratio’s developer, economist and Nobel laureate Robert Shiller, the ratio’s long-term mean is about 17; on May 2, it was poised at about 29. The CAPE ratio has been higher only twice—in 1929, when it reached 33, and for a few years around 2000, when it soared to 44. Both times, those high points were followed by stock market swoons.

2. According to factset.com, two sets of S&P 500 data have reversed their usual relationship: Since December, 2007, changes in the index’s price have run below (or equal to) changes in its forward earnings per share. But in the fall of 2013, the price-change curve rose above the changes-in-forward-earnings curve. Since the cross-over, the gap has continued to widen. Does that matter? Maybe not. But the last time it happened, in December, 2007, the S&P 500 plunged 37 percent within a few months.

Different this time?
Still, all that may not be important. Past events in the stock markets are not reliable indicators of future events. On top of that, the economy seems to be good shape, even though it grew by only 0.7% in the first quarter. On April 11 Fed chair Janet Yellen made several upbeat comments:  The economy looked “slightly more robust and healthier;” March unemployment fell to a low of 4.5%; consumer spending was growing at a decent pace; lending was growing in a “very healthy way;” and corporate earnings were strong. It all sounds good. So maybe the CAPE ratio and the disparity between S&P 500 price changes its forward earnings changes are just statistical noise. Maybe.

Maybe not
3. A chart offered by mtpl.com gives us additional cause for concern. It shows that since 1880, the price-to-earnings (P/E) ratio of the S&P 500 has been above 25 for only three periods. Each time, the ratio stayed at that level just briefly, then plunged to a dismal depth. The last time that happened was right before the disaster of 2008. With all that in mind, it may be significant that the S&P 500 trailing P/E  ratio stood at 25.25 on May 2.

That, by itself, is not necessarily cause for alarm. P/E ratios should not be used as stand-alone indications of appropriate pricing. Sometimes, all they mean is that investors expect rapid growth in earnings per share.

But that point does not allow us to simply shrug off the possible implications of the three data-sets just reviewed. The high P/E ratio, the lofty CAPE ratio, and the worrisome reversal of the usual relationship between price and forward earnings–all three taken together may mean that the U.S. stock markets are precariously balanced on the edge of a cliff.

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