There have been only four other occasions over the last century when equity valuations were as high as they are now, according to a variant of the price-earnings ratio that has a wide following in academic circles. Stocks on each of those four occasions would soon suffer big declines.
This modified P/E was made famous in the late 1990s by Yale University professor Robert Shiller, particularly in his book "Irrational Exuberance." In this modified P/E, the denominator is not current earnings per share but average inflation-adjusted earnings over the trailing 10 years. This modified ratio — sometimes called P/E10, or CAPE (for Cyclically Adjusted Price Earnings ratio) — has a markedly better forecasting record than the simple P/E.
According to Shiller's website, the CAPE currently is 23.5, or some 43% higher than the CAPE's long-term historical average. The four previous occasions over the last 100 years that saw the CAPE as high as they are now:
• The late 1920s, right before the 1929 stock market crash
• The mid-1960s, prior to the 16-year period in which the Dow went nowhere in nominal terms and was decimated in inflation-adjusted terms
• The late 1990s, just prior to the popping of the internet bubble
• The period leading up to the October 2007 stock market high, just prior to the Great Recession and associated credit crunch