The stock market’s recent record highs mask concerning signals we should carefully consider. With the Shiller P/E ratio reaching 38.18 in November 2024—a level seen only twice before in history—market professionals are increasingly cautious about potential corrections ahead.

Until last week, I had never heard of the Shiller P/E ratio. I understood Profit to Earnings, but not Shiller. In case you’re like me, let me explain what I learned. The Shiller PE (or CAPE ratio) is a way to measure if the stock market is overvalued or undervalued. It compares the price of the S&P 500 to its average inflation-adjusted earnings over the past 10 years. It’s typically used to help investors see the bigger picture and not get caught up in short-term market swings.

Here’s why this matters right now:

1. The Shiller P/E ratio stands at more than double its historical average of 17.17, a level previously seen only during the dot-com bubble and early 2022’s market peak. Historically, readings above 30 have preceded significant market corrections ranging from 20% to 89%.
2. The U.S. is experiencing its first decline in physical money circulation since the Great Depression. The less money in circulation, the less money people have to spend.
3. There’s also something happening with long-term rates, like a 10-year treasury yield, which has fallen below shorter-term rates, like a 2-year treasury yield. This has historically been an indicator of a looming recession.
4. While current market enthusiasm is partially driven by AI advancements and potential political developments, these factors may not justify such elevated valuations.

But wait, the stock and crypto markets are at record highs? How can this happen, and we have all these indicators of a recession in the next 24 months?

Several things come into play. Some numbers are considered “lagging indicators.” When we get a jobs report, it’s past data, whereas the stock market is real-time. Investor psychology could be having an impact, especially with AI, and hopes for a soft landing. We might see industry-specific recession indicators that don’t impact the full market. Heck, we could be enjoying short term gains, and they just might not be sustainable.

What can we do?

Industry Focus: The market is going to be wonky in several industries. Is now the time to consider a change in focus? If this is a path you’re going down, ask us, and we’ll provide you with training around exploring a new niche.

Cash Flow Management: Cash is king, and we should all be hoarding it right now. Consider distributed and extended payment terms with your clients to preserve cash flow.<