Valuations and Bear Markets

U.S. equity valuations are high.

How high?

In January, the CAPE (Cyclically Adjusted P/E) ratio rose to 33.76. This is more than double the average historical CAPE Ratio since 1900. It is also higher than every period in history with the exception of the late 1990s on the way up (February 1998 onward) and early 2000s on the way down (until May 2001).

S&P 500 CAPE ratio and Historical average from 1900 to 2018 image

Source: Robert Shiller, Pension Partners

A discussion of high valuations inevitably leads to the following question: is a bear market imminent?

The answer is less than intuitive. While valuation extremes tend to be associated with below-average long-term returns (see table below), they tell you nothing about the path or timing of those returns.

Image of S&P 500 annualized average forward returns from 1928 to 2016

Source: Robert Shiller, Pension Partners

Historically, we have seen Bear Markets after extremely high valuations (1929, 1998, and 2000) and extremely low valuations (1932, 1948, 1976, and 1980).

S&P 500 bear markets and valuations list from 1929 to 2011

Source: Robert Shiller, Pension Partners

Does that mean that extreme valuation levels are meaningless? From a timing perspective, yes. In the short run, investor sentiment (Benjamin Graham’s “voting machine”) is all that matters. As such, an expensive market can always get more expensive while a cheap market can always get cheaper.

But in the long run, extreme valuations can skew the probabilities, either in your favor (cheap market) or against you (expensive market). From current valuation levels, the odds above-average U.S. equity returns over the next 5-10 years are not high. But how we get to those returns is anyone’s guess.


To sign up for our free newsletter, click here.

Related Posts:

When Mean Reversion Fails

Is This 1929 or 1997?



Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. Charlie holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and also holds the Certified Public Accountant (CPA) certificate.

In 2017, Charlie was named the StockTwits Person of the Year. He is a frequent contributor to Yahoo Finance and has been interviewed on CNBC, Bloomberg, and Fox Business.

You can follow Charlie on twitter here.


Pension Partners, LLC is a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. For more information about Pension Partners please visit: and search for our firm name.

The information herein was obtained from various sources. Pension Partners does not guarantee the accuracy or completeness of such information provided by third parties. The information given is as of the date indicated and believed to be reliable. Pension Partners assumes no obligation to update this information or to advise on further developments relating to it.


This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

The Standard & Poor’s 500, often abbreviated as the S&P 500, or just the S&P, is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ.

The cyclically adjusted price-to-earnings ratio, commonly known as CAPE, Shiller P/E, or P/E 10ratio, is a valuation measure usually applied to the US S&P 500 equity market. It is defined as price divided by the average of ten years of earnings (moving average), adjusted for inflation.


Comments are closed.