The Dow: An Anniversary Warning

As of 10:15 a.m. EDT, the Dow Jones Industrial Average (INDEX: ^DJI  ) is down 0.04%, and the S&P 500 (INDEX: ^GSPC  ) is down 0.14% -- in other words, flat. Despite the unrest on the streets of Greece to greet German Chancellor Angela Merkel and disagreement in Luxembourg among Eurozone finance ministers on how to address a Greek bailout that has veered badly off course, I suspect the focus of U.S. investors is now firmly on the earnings season. With Alcoa (NYSE: AA  ) only kicking things off after the market close today, expect volatility to be muted during today's session. Surely we're used to that by now.

On a broader timeframe: Five years ago today, on Oct. 9, 2007, both the Dow and the S&P 500 closed at all-time highs. What is the lesson here? Valuation matters. At 1,565.15, the S&P 500 was valued at a very rich 27.8 times its 10-year trailing average of real earnings (the so-called "Shiller P/E"), nearly 70% above the historical average.

Where does that leave us five years on? Based on yesterday's closing price, the index now sports a Shiller P/E of 21.9 for a premium over the historical average of 33%, which suggests it's no time to be going all-in on U.S. stocks. Long-term investors should consider that the average historical return -- roughly 6.25% annually after inflation -- is a ceiling for expectations from this point forward. Incidentally, income return (reinvested dividends) contributed better than two-thirds of that historical return, which is why one of our top analysts believes you can "Secure Your Future With 9 Rock-Solid Dividend Stocks." Click here to claim your free report and find out which they are.

Alex Dumortier, CFA has no positions in the stocks mentioned above; you can follow him @longrunreturns. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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