Financial Advisor reports on Wharton School of Finance Professor Jeremey Siegel’s comments at the annual Inside ETFs conference, where he critiqued the widely used Shiller P/E Ratio. Siegel did not necessarily attack the original logic of the Shiller P/E (which won its creator, Robert Shiller, a Nobel Prize). Instead, he noted that changes to the definition of generally accepted accounting principles (GAAP) earnings by Standard & Poor’s in 1990 have had an effect. Following the Financial Accounting Standards Board requirements, the GAAP change required mark-to-market accounting, which means companies mark down their assets when they have a loss but can only markup assets when they are sold.
Turning to the market, Siegel described himself as “the token bull.” He maintained that Fed policy is not “artificially inflating stocks” and we are not experiencing a new bubble. Nonetheless, he concurred with many observers that investors should expect lower returns going forward, but predicted about 5-5.7% real returns over the next decade. He cited slightly high valuations, slow economic growth, the risk aversion of an aging population, and a perplexing decline in productivity. On bonds, he predicted a bigger decline, with real returns around 1.0% to 1.5%.
Prof. Robert Shiller is voicing concerns over multiple factors right now, including the high CAPE ratio (the P/E of the market using 10 years’ worth of earnings) and the increased volatility in stocks. The large downward moves recently in equities have led many investors to pay much closer attention to the market’s daily movements, especially on down days. This hyper-attention to downside volatility could result in another move down as investors sell or react to what is transpiring. In addition, earnings growth has been strong over the last few years and Shiller warns that growth could start to slow and be more in line with historical growth rates as margins contract. Although Shiller is much more concerned about the market than many other pundits, he admits that stocks can continue to move higher despite the many risk factors that concern him. View the full video of his comments below.
Today’s markets are dominated by computer-based trading and complicated algorithms that can profit from very small inefficiencies in the market over split second periods of time. Many argue that these computer systems have made outperforming the market considerably more difficult. Yale professor Robert Shiller looks at this argument in his latest article for Capital Finance International. Shiller looks at the recent book “The Incredible Shrinking Alpha”, which argues that ““the hurdles to achieving alpha [returns above a risk-adjusted benchmark – and thus a measure of success in picking individual investments] are getting higher and higher”, and examines whether alpha may eventually be eliminated by market efficiency. The issue with the argument of an efficient market, however, according to Shiller is that it does not explain the story-based fluctuations that occur on a regular basis in the market. Things like the large emotion-fueled swings recently in China and the fact that viral stories can significantly move the market seem to contradict that theory that the market has become completely efficient.
In the end, Shiller concludes that the market remains inefficient as it always has been. As Shiller puts it “Human judgment, good and bad, will drive investment decisions and financial-market outcomes for the rest of our lives and beyond.”
Nobel Prize-winning economist Robert Shiller says US stocks are among the most overpriced in the world. But he’s not ditching American equities altogether.
Nobel Prize-winning economist Robert Shiller — who called both the technology bubble and the housing bubble — says the bond market is not currently fitting the traditional definition of a bubble. But he says that long-term bonds are a risky choice right now.
Nobel Prize-winning economist Robert Shiller says that, while US equities look to be on the pricier side, stocks in other parts of the world are dirt-cheap.
Nobel Prize-winning economist Robert Shiller says that, while valuations are quite high, he isn’t ditching stocks.