Price premium

Medical tests and long-lasting comfortable shoes are some of the things that can have a high price but still be a good value.

It’s getting difficult for investors to make the same argument for the stock market, however. One popular measure for checking whether the market is overpriced compares the price of the Standard & Poor’s 500 index to how much profit its companies earned in the prior 10 years, adjusted for inflation. The measure was popularized by Robert Shiller, who won the Nobel prize for economics in 2013.

The measure, known as

CAPE for “cyclically adjusted price-earnings” ratio, shows that the stock market has been as expensive as it is now only twice before: just before the Great Depression, and during the dot-com boom. Both periods ushered in disastrous returns.

Of course, stocks can stay expensive for a while. The S&P 500 reached the same valuation level as it’s at now in 1997. Anyone who sold then would have missed out on the gains the market made in the ensuing three years, before popping at the height of the dot-com bubble.

Plus, interest rates are lower now than they’ve been in the past. That’s a reason bullish investors say stocks deserve to carry a higher price tag: They look like better options than bonds.