Tags: Robert | Shiller | Oddball | Dangerous | Stock | Market

Yale's Shiller: 'Oddball Mood' Could Push 'Dangerous' Stock Market Higher

(AP/Jessica Hill)

By    |   Thursday, 27 April 2017 05:13 PM

Nobel laureate Robert Shiller warns savvy investors that an “oddball mood” could push a “dangerous” stock market to even higher valuations.

Shiller's cyclically adjusted price-to-earnings ratio, which compares the current value of equities to inflation-adjusted earnings over the past 10 years, is at levels not seen except for the years surrounding 1929 and 2000. And at 29, the ratio is higher than its highest level before the Great Recession.

But Shiller makes it clear this doesn't necessarily suggest that investors should sell stocks.

"I'm not saying pull out of the market — I'm saying that it looks dangerous now," the Yale economics professor told CNBC's "Trading Nation." "But it could keep going up."

After all, "if you go back to 1998, you'll find that the CAPE ratio was about the same as now, and it kept going up for two more years. It got up to something like 45 in the year 2000. So we could go back up there. And we're in an oddball-enough mood now that we might," Shiller said, referring to excitement surrounding President Donald Trump.

"The magic of the Trump story is that it gets stronger than any other news. It pushes everything else aside, partly business people identify with Trump [and have] an urge to gamble on this guy," Shiller told CNBC in a phone interview.

A further rally followed by a crash, then, is certainly a potential outcome. Although as Shiller also makes clear, investors shouldn't obsess over the level of the CAPE ratio.

"The idea that these ratios represent forecasts for the underlying value is just not right," he said. They mostly shed light on "psychological narratives."

Meanwhile, Newsmax Finance Insider Lance Roberts recently took Shiller's CAPE to task.

Shiller’s measure, created with Harvard University economist John Campbell in the 1990s, is called the “cyclically adjusted price-earnings,” or CAPE ratio. The index, sometimes called the “Shiller P/E,” essentially divides share prices by the average of 10 years' earnings adjusted for inflation. It compensates for extreme volatility by valuing share prices based on 10 years of earnings, rather than one year.

"But the debate over the value, and current validity, of the Shiller’s CAPE ratio, is not new. Critics argue that the earnings component of CAPE is just too low, changes to accounting rules have suppressed earnings, and the financial crisis changed everything," Roberts wrote for Newsmax Finance.

Roberts explained that this was a point made by Wade Slome previously:

“If something sounds like BS, looks like BS, and smells like BS, there’s a good chance you’re probably eyeball-deep in BS. In the investment world, I encounter a lot of very intelligent analysis, but at the same time I also continually step into piles of investment BS. One of those piles of BS I repeatedly step into is the CAPE ratio (Cyclically Adjusted Price-to-Earnings) created by Robert Shiller.”

(Newsmax wires services contributed to this report).

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Nobel laureate Robert Shiller warns savvy investors that an "oddball mood" could push a "dangerous" stock market to even higher valuations.
Robert, Shiller, Oddball, Dangerous, Stock, Market
Thursday, 27 April 2017 05:13 PM
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