Nobel prize-winning economist Robert Shiller claims the current stock market valuations today are not excessive despite today’s high CAPE ratio, often used to illustrate the overvaluation of stocks.
Shiller developed the cyclically adjusted price-earnings (CAPE) ratio market valuation measure, which is calculated using price divided by the index's average historical 10-year earnings, adjusted for inflation.
Shiller, who was awarded the Nobel Prize in Economic Sciences with Eugene Fama and Lars Peter Hansen in 2013, contends that extremely low interest rates justify today’s stock prices.
“The level of interest rates is an increasingly important element to consider when valuing equities,” Shiller wrote in a recent blog on Project Syndicate.
Eventually bond yields could rise, and equity valuations may have to reset. But at this point, “despite the risks and the high CAPE ratios, stock market valuations may not be as absurd as some people think,” says Shiller, who also helped develop the widely-followed S&P/Case-Shiller Home Price Indices.
The low level of interest rates indicates that equities may not be overvalued after all.
However, not everyone agrees about stock values these days.
For example, Morgan Stanley’s Mike Wilson says U.S. equities are overbought and at risk of a correction after their recent surge.
One key risk that most people are overlooking is that Treasury yields continue to march higher, which could create jitters that send stocks lower, said the firm’s chief investment officer who began his career at the bank more than 30 years ago.
“The market is overbought and the market is probably a little bit overvalued quite frankly because interest rates are finally now starting to catch up,” Wilson said on Bloomberg TV. “The risk in the market now is that as 10-year yields finally start catching up, we have a valuation reset because stocks are a long duration asset, particularly the U.S. stock market.”
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