Today, with markets at all-time highs, and just two months left in the year, I want to address a question I keep hearing from investors: is the stock market in a “bubble?”

Many financial media pundits, investment managers, even Federal Reserve Chairman Jerome Powell have said equities are overvalued.

First and foremost, based on historical valuation metrics, the stock market is overvalued.

On price-to-earnings, price-to-book, the Schiller Index, the “Buffett Rule,” etc., stock valuations are high. Furthermore, the returns over the past three years have been remarkably smooth. I am reminded of the iconic Grateful Dead song, “Uncle John’s Band,” when Jerry Garcia sings, “When life seems like easy street, there’s danger at your door.”

Ultimately, the high valuation of stocks must be justified by continued AI spending that translates to higher productivity and higher corporate profits. On this point, I’m optimistic. Last month, Bank of America released a report stating they expect investments in artificial intelligence to nearly triple over the next five years to $1.2 trillion annually, “constrained only by the ability to scale buildings and power.”

Others believe we are in a much later stage of the AI buildout.

Regardless, readers must be prepared when inevitable corrections and bear markets arise. It goes without saying that sooner or later, we’re going to have another recession, sharp correction, or a bear market, and the financial media will then turn from reporting “boom” to “gloom.”

Here is a worthwhile exercise: when you get your monthly brokerage statement, discount its current value by 15-20% – or more. That will give you a margin of safety, in your own mind, as to what your portfolio value is worth, and help you be psychologically prepared, in advance, for a sharp market drop.

I’m not suggesting that is what’s about to happen, but it is helpful.

Take care, invest rationally, and have a great holiday season.