In a recent interview in Forbes, Nobel laureate Robert Shiller says that the stock market is not as overvalued today as it was in 2007 — but it’s getting darn close.
Yale Economist Robert Shiller says that some tech stocks look and feel like they are in a bubble right now, but that it doesn’t seem as bad as the late 90s tech stock bubble. Shiller tells Bloomberg that the market overall is “on the high side and it’s being driven by technology recently, but it’s not like it was [in the late 90s].” He notes that his 10 year cyclically adjusted price/earnings ratio was nearly twice as high back then as it is now for the broader market. Shiller also talks about his belief that long-term value investing is the best approach to beating the market. And he talks about how using such an approach means you shouldn’t be impacted too much by high-frequency trading issues.
Nobel Prize-winning Yale Economist Robert Shiller recently appeared on WealthTrack and offered some of his thoughts on where he’s been finding value in the stock market.
The world often wants top investors and economists and strategists to give advice. But what’s the best financial advice that those great minds have received?
The Wall Street Journal posed that question to a number of top thinkers recently. The respondents include Nobel laureates Robert Shiller and William Sharpe, as well as investment gurus Carl Icahn and Seth Klarman. A few of the responses dealt specifically with not falling prey to short term thinking. “An investor should think like a business owner, not a renter,” said Morningstar CEO Joe Mansueto. “Most businesspeople don’t get up in the morning and ask whether they should sell their business that day. … They show patience and persistence and try to understand their underlying business better so they can earn the greatest return for the longest period of time.” Investors, he says, “are in many ways misled by stock-market volatility. The values of the underlying businesses just don’t change as quickly as stock prices do. You really don’t have to watch those changes hawklike day after day.”
Jane Mendillo, who heads up Harvard’s endowment, said “Take the long-term view”‘ was the best advice she ever received. “If you take the long-term view, you will see things others miss,” she said. “Nearly everyone thinks about next month, next quarter. Jack Meyer, who ran [the] Harvard endowment for 15 years, taught me that when you think about multiple years or even decades you see opportunities to create value others might not see, and you make different judgments today as a result.”
While many bears have pointed to the 10-year cyclically adjusted price/earnings (CAPE) ratio as a reason to avoid U.S. equities, Yale Economist and recent Nobel laureate Robert Shiller — who helped popularize the metric — says U.S. stocks still “should be a part of a portfolio”. Shiller tells Bloomberg Surveillance that, though the U.S. market is relatively highly priced according to the CAPE, it’s “not that overpriced”, and given the alternatives he thinks investors shouldn’t avoid U.S. equities. Shiller also talks about active vs. passive investing, saying, “I think that one can in the long run do better” than passive index funds, particularly with a value-oriented active approach.
“I’m not really saying don’t invest in stocks,” Shiller tells CNBC’s Futures Now. “[But] don’t expect miracles. He says the market’s valuation looks “high by historical standards, but it’s not super-high. I’d say it’s suggesting — based on historical evidence — real returns of something like 3 percent a year for the next decade.”
Shiller also counters Wharton Professor Jeremy Siegel, who recently criticized the use of the 10-year cyclically adjusted price/earnings ratio — Shiller’s preferred valuation metric. “He’s a smart guy, he makes good points, Shiller says. “He tends to be a little bullish, I think. But the measure that he uses is going quite far from traditional price-to-[earnings ratios]. He is proposing a national income and product account definition of earnings, rather than earnings that correspond to the stocks in the S&P 500. And even if you take that, suppose we accept that, then the market is still not low-priced!”
Yale Economist and housing guru Robert Shiller says that he doesn’t think the U.S. housing market is in “boom territory”, but he does compare the current environment to the start of the late 1990s/early 2000s housing boom . Shiller tells FOX Business Network that he thinks home prices will probably keep going up for another six to 12 months. But after that, he says he’s not sure, as he’s worried that an environment of housing shortages and record-low rates, which were driving prices higher, is ending.
Confidence: It’s one of the main drivers of economies and stock markets. But as Yale Economist Robert Shiller points out in a recent New York Times column, we still know little about how it works.
“There is considerable hope that the markets are heralding a major development: that Americans have lost the fears and foreboding that have made the financial crisis of 2008 so enduring in its effects,” Shiller says. “Hope is a wonderful thing. But we also need to remember that changes in the stock market, the housing market and the overall economy have relatively little to do with one another over years or decades. … Furthermore, all three are subject to sharp turns. The economy is a complicated system, with many moving parts.”
Shiller says that often-cited confidence gauges aren’t able to give insight as to what’s behind the changes in the measures, and aren’t able to show what factors of confidence drive which parts of the economy. He highlights some interesting data he’s collected on confidence, including what he calls the “valuation confidence” index. It measures the percentage of respondents who think stocks are not overvalued. Just before the market peak of 2007, the figure was about 80% for both institutional investors and individual investors. Through February of this year, it was 72% for institutional investors and 64% for individuals, he says.
Shiller also discusses the 10-year cyclically adjusted price/earnings (CAPE) ratio, which uses inflation-adjusted average earnings over the past ten years to smooth out annual fluctuations. For the S&P 500, it has averaged about 16 over the long term, and now sits at 23. “This suggests that the market is somewhat overpriced and might show below-average returns in the future,” he says. Still, the CAPE is well below its record of 46 reached during the Internet bubble. It isn’t that far below the 27 peak reached before the 2007 bear market. But in that case, the cause of the market crash wasn’t the bursting of a stock market bubble, but instead the subprime mortgage and financial crises, which most investors “couldn’t have known” would occur, Shiller says.
The bottom line for Shiller seems to be that unpredictability often reigns when it comes to confidence, and thus stocks and economies. While many have been getting excited about the S&P 500 nearing an all-time high, for example, he notes that using inflation-adjusted total returns, the index hasn’t hit a new high in 13 years. That means investors haven’t made real money in 13 years, which “hardly seems a reason for confidence,” he says. “But public thinking is inscrutable,” he adds. “We can keep trying to understand it, but we’ll be puzzled again the next time the markets or the economy make major moves.”
Yale Economist Robert Shiller says he thinks stocks are priced to return less than their historical averages, but that they should still be a substantial part of an investor’s portfolio.
“The important thing is that you never get completely in or completely out of stocks,” Shiller tells Business Insider in discussing the 10-year cyclically adjusted P/E ratio, which uses inflation-adjusted earnings over the past decade as a way to value stocks. “The lower CAPE is, as it gradually gets lower, you gradually move more and more in. So taking that lesson now, CAPE is high, but it’s not super high. I think it looks like stocks should be a substantial part of a portfolio.” He says he’s expecting “something like 4 percent real for the stock market, as opposed to 7 or 8 percent historically”, though he doesn’t specify over what period he’s looking.
Shiller also says that investors don’t have to buy the whole market. If the CAPE is high, they can focus on sectors that have lower CAPEs. He’s been working on low-CAPE sector funds with Barclays.