For many years now a relatively large contingent of analysts, investors and journalists has been convinced the stock market was in a bubble because the "Shiller P-E" ratio was just too high. Back on 8/12/2013, in our Monday Morning Outlook, we made our case that the Shiller model was too pessimistic. Now that looks like a pretty good call.

In the past four years, the bull market in stocks has continued, with the S&P 500 generating a total return – including both share price increases and reinvested dividends – of almost 60%, or more than 12% per year.

The response from many in the market is to say "OK, maybe a Shiller P-E ratio of 23.4 (from 8/2013) wasn't too high. But now it's 30.5, and the bull market really is doomed."

As we said four years ago, Yale University economics professor Robert Shiller has made some great calls. In his 2000 book, "Irrational Exuberance," Shiller argued that a 10-year average of corporate earnings smooths out the ups and downs of the business cycle. Then, using this "cyclically-adjusted" level of earnings and comparing it to stock prices he claimed to generate a better version of the P-E ratio. It was an all-time high in 1999-2000, a clear signal of a "bubble" in stocks.

Several years later, Shiller warned investors about a housing bubble: Another prescient call. Although we don't see eye to eye with Shiller about how the economy works, no one should doubt his intelligence or sincerity.

But that doesn't make him infallible. We still think the Shiller P-E is painting an overly pessimistic view of the stock market. One basic flaw is that by using a ten-year time horizon for earnings, the Shiller P-E includes a massive drop in earnings from 2008-09 generated by awful political management of the economy and a mis-use of mark-to-market accounting.

But even if you take the Shiller P-E at face value, the situation isn't as bad as some claim.