To paraphrase a famous quotation, “The markets always do the right thing. Eventually.” We just don’t know when that will be, and therein lies a dilemma:

Should investors keep riding the current bull market? Or should they put new invested money into something more conservative?

In previous posts I offered some technical reasons for caution. Those reasons are still there. On August 4, the S&P 500 price/earnings ratio (P/E) stood at 24, a hefty 31 percent higher than its long-term average of 17. That in itself is no cause for alarm. The S&P’s P/E ratio has been higher, and corporate earnings have been strong.

But the Cyclically Adjusted Price Earnings (CAPE) ratio sends a more sobering signal. As explained in my “Market Probe” post, the CAPE refines the standard P/E ratio by using a 10-year average of ex-inflation earnings as the P/E denominator, instead of current or 12-month earnings. Studies show that the CAPE (developed by economist Robert Shiller) tracks the S&P 500 much more closely than P/Es using short-term data.

So where is the CAPE now? It stands (on one leg?) at the lofty level of 30, which puts it in the 97th percentile of its historical range, according to an August 2, 2017, article by Jill Mislinski, writing in the data-rich website, advisorperspectives.com. That the CAPE is so near the top of its range strikes me as cause for concern. It wouldn’t be so worrisome if all this bullishness were spread throughout the market. But that’s not the case. Instead, about one-third of the market’s rise in 2017 has come from a single asset class–giant tech companies. Of course, their products are vital to the U.S. economy, and their earnings have surged at a heady pace, so surely nothing can go wrong. Go wrong. Go wrong. Go wrong.

Given all that, what’s the right thing to do? The unfortunate answer is that nobody knows, because mere humans cannot predict the future, a central point in my latest book, The Smartest Way to Invest.

But one thing seems clear: It’s not a good idea to sell a large part of your current stock holdings in an attempt to time the markets. As explained in my “Too Many Hands” post, people who try that tactic usually wind up with lowered earnings. In addition, it’s at least conceivable (though unlikely) that we’re in a new era where stocks just keep rising, with only minor down-turns.

 

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