Tags: robert | Shiller | Stocks | fall

Shiller: Stocks May Be Headed for Another Crash

By    |   Wednesday, 17 Mar 2010 02:58 PM

Robert Shiller, the Yale economist who famously predicted the 2000-02 stock crash, says the market may be in trouble once more.

Stocks already are overvalued, he says. And a renewed housing slump could send the market tumbling.

“I wonder about a return to another break in the market," he recently told The Wall Street Journal.

Shiller has put together price-earnings (PE) statistics going back to 1881. He bases his numbers on monthly stock prices and profit averages over prior 10-year periods.

The long-term PE ratio averages about 16. When the ratio exceeds 20, as it does now, the data show that the market is overdone and eventually hits the skids.

The market declines an average of about 2 percent annually in inflation-adjusted terms during the decade after the PE ratio hits the magic 20 level.

Once stocks drop, the ratio eventually falls below the average level of 16. Then, of course, stocks are undervalued, leading to the next bull market.

But the scary issue now is that since 1991, the PE ratio has dropped below the 16 mark for only seven months — in late 2008 and early 2009.

The silver lining is that the ratio is now far from its 2000 peak of 40.

Still, plenty of experts expect the 70 percent rally of stocks over the past year to continue.

Goldman Sachs strategist Abby Joseph Cohen told CNBC that the Standard & Poor’s 500 Index should end the year at 1,250 to 1,300.

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Robert Shiller, the Yale economist who famously predicted the 2000-02 stock crash, says the market may be in trouble once more. Stocks already are overvalued, he says. And a renewed housing slump could send the market tumbling. I wonder about a return to another break in...
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2010-58-17
Wednesday, 17 Mar 2010 02:58 PM
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