It’s nice to get confirmation about something I’ve held for years, especially from someone like Mark Hulbert who has been in the investment game for years: the is nowhere near a new all-time high, on an -adjusted basis. Not even close.

The all-time high was back in 2000, at just over 2000 on the index:

Consider the data, courtesy of data compiled by Yale University finance professor Robert Shiller. In inflation-adjusted terms, the S&P 500 hit its all-time high in early 2000, at the top of the internet bubble.

If we were to denominate that index’s level in today’s dollars, the S&P before the bubble burst would have been above 2,000 —24% higher than where it stands today.

Naturally we have the to thank for that, as well as the people on CNBC and MSNBC who talk about new highs. Indeed, the market has been on a tear. The S&P 500 was at 1257 a year ago. Yesterday it closed at 1618, a gain of almost 30 percent. And despite nearly unanimous clamor that the market can’t go any higher because of weakening fundamentals in the (i.e., the Baltic Dry Index is at 878, down from 1150 in November), the market continues to move higher.

But there’s more than just pointing out the impact of inflation. There’s the price/earnings ratio which some experts watch to see if the market is overvalued or not. When inflation is taken into account, that ratio is way above average:

This modified version, known as the cyclically adjusted p/e ratio, or CAPE, divides the S&P 500’s level by average inflation-adjusted earnings over the trailing 10 years…

Where does the CAPE stand today?

It currently is at 23.3, which is 41% higher than its historical average. While the CAPE’s current level is not as high as the 40+ readings that were registered at the top of the internet bubble, it does not bode well for the next ten years. On average over the last century, the S&P 500 has produced a 10-year inflation-adjusted return of close to zero whenever the CAPE has been above 20.

Let’s repeat that: whenever the CAPE has been above 20, the S&P 500 Index produces zero returns over the next decade! The implications of that are unnerving, to say the least.

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