Long-term investors ought to use the recent market rally to cut back on their equity holdings, according to Yale professor of economics Robert Shiller.
The S&P 500 forward price-earnings ratio, a common measure of market valuations that compares the index's current price to analysts' consensus expectation for earnings over the next year, is now at the highest level since 2004, according to information from S&P Global.
The cyclically adjusted price-earnings (or CAPE) ratio developed by Shiller shows even greater overvaluation; that metric, which compares current prices to average earnings over the past 10 years adjusted for inflation, is more elevated than it's been since 2002.
The CAPE ratio, which aims to measure earnings over the course of an entire business cycle, is "high enough to worry about," Shiller said Thursday on CNBC's "Trading Nation." "At this level, it suggests that the expected returns for stocks might be negative, but only slightly so."
Shiller is quick to add that since short-term moves are nigh impossible to forecast, the metric "is not suggesting, necessarily, any imminent disaster."
Still, the current level of the CAPE ratio "would suggest reducing your holdings of stocks, especially for a long-term investor. We can't time the market accurately, but we know that when it's this high, over the long term, it usually doesn't do great."