The Shiller CAPE ratio is a popular indicator used to measure the stock market’s stability. Right now, it’s giving us some bad news… but don’t panic: it’s not all doom and gloom.
CAPE stands for ‘cyclically adjusted price‑to‑earnings’ — basically, it’s a valuation metric that measures how over-hyped the market is.
When stocks consistently grow for an extended period of time, traders and investors tend to get a bit carried away. As a result, markets get bloated — people start paying way too much for stocks based on pure speculation, hope and FOMO (fear of missing out).
That creates an unsustainable environment and eventually, it all comes tumbling down. That’s what the Shiller CAPE tracks.
Currently, it’s sitting around 41.5 for the US S&P 500, way above the historical average of about 17. The ratio reached its all-time historical peak of 44.2 in December 1999 at the height of the dotcom bubble.
Now, it’s less than three points away from breaking that record. If you were there in 1999, then you know what comes next.
So what’s the good news?
A UK safe haven
UK shares have often traded at lower valuations than the US, which can provide some a ‘safe haven’ during a global financial crisis. Of course, they’re not immune to worldwide shocks but they can be more defensive.
When applying the Shiller CAPE ratio to the FTSE 100, it only sits at approximately 20.07.
That’s because sectors like energy, financials, and materials carry more weight in the FTSE 100 than in the S&P 500 (where tech dominates). Right now, AI is working really hard to replicate a dotcom scenario.
So what does this mean for investors?
Tracking defensibility
In the event of a market crash, the mitigating factors are relevant: oil prices, interest rates, credit stress. These will shape how a downturn plays out for UK stocks versus US tech‑heavy indices.
So for investors looking to safeguard their portfolios, it’s important to assess these impacts. Right now, one of the safest UK shares, in my opinion, is Tesco (LSE: TSCO).
Demand for groceries stays relatively steady even in a downturn, so its sales and cash flow are usually less cyclical than those of many other FTSE names. It also benefits from being the UK market leader, which gives it scale, brand strength, and pricing power.
Even though tough competition from Aldi and Lidl constantly pressures the retailer, it continues to match low prices. Still, if the economy weakens, tighter consumer spending could threaten profits.
Its 3% dividend yield isn’t spectacular but it’s very reliable, and recent share buybacks help support total returns when markets are volatile.
The main appeal isn’t rapid growth — it’s resilience, income, and everyday-necessity exposure. That’s exactly the kind of profile investors often want when protecting a portfolio from a possible market crash.
The bottom line
Just because one indicator is flashing red doesn’t guarantee a crash. The world today is very different to how it was in 1999, so a direct comparison isn’t necessarily accurate.
But as the saying goes: “If you fail to prepare, prepare to fail”.
It’s worth considering defensive options like Tesco, even if the short-term potential is weaker. In a worst-case scenario, it can also protect a portfolio against catastrophic losses.
For risk-averse investors like myself, financial safety is the number one priority. That’s where defensive shares win.
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Mark Hartley owns shares in Tesco.
