By Nicholas A. Vardy, CFA
Yale University Professor and Nobel Laureate Robert Shiller has a lot of street cred.
The first edition of his book Irrational Exuberance came out just before the dot-com bubble burst in 2000.
The second edition in 2005 warned of the coming collapse of the U.S. housing boom.
The third edition was just published in January.
Should you be worried?
Shiller points out that the U.S. stock market trades at a long terms cyclically adjusted price-to-earnings (CAPE) ratio of 27.8. Compared with its long-term average of around 16.5, the U.S. stock market is overvalued by close to 70%.
That doesn't mean it can't go higher. After all, the CAPE ratio hit 32.6 in September 1928 and 47.2 in March of 2000.
But we all know what happened afterward.
Not that CAPE is the "Holy Grail" of investing. Rival academic stock market guru Jeremy Siegel at the University of Pennsylvania's Wharton School has argued that CAPE makes stocks seem more expensive than they actually are due to changes in accounting standards in the 1990s.
Nevertheless, a look at global stock markets ranked according to CAPE is revealing.
The U.S. stock market is the most expensive major stock market in the world. Only tiny Denmark trades at higher valuations.
That should give you pause...
Even as the U.S. markets hit record highs, the U.S. bull market is getting long in the tooth.
Thanks in large part to collapsing earnings in the energy sector, some analysts are predicting the Standard & Poor’s 500 Index /zigman2/quotes/210599714/realtime SPX -2.54% will see no earnings growth at all in the first quarter of 2015.
That would make this the worst quarter for S&P 500 index earnings since the third quarter of 2009.
Why global value will trounce the S&P 500 in 2015
So, what's the antidote to buying overvalued U.S. stocks?
Do the opposite...
Buy global stocks. And buy value