Tags: Shiller | stock market | ratio | investing

Yale's Shiller Remains in Stocks 50 Percent, Stays Cautious

By    |   Friday, 10 October 2014 01:43 PM


Robert Shiller, the Yale University finance professor who shared the Nobel Prize in economics last year for his stock-price volatility research, said he has kept 50 percent of his portfolio in stocks and he didn't sell after Thursday's plunge.

Shiller, who predicted the collapse of both the technology-stock bubble in 2000 and the real-estate boom in the late 2000s, noted that he is "slightly overweight" in healthcare and industrial stocks.

“The market has gone up for five years now and has gotten quite high, but I’m not selling yet,” Shiller told Wall Street Journal columnist Jason Zweig.

Shiller, who is renowned for telling people when to get out of the market, advises investors to monitor not just the level of the market, but the “stories that people tell” about the market.

Meanwhile, Shiller's cyclically adjusted price-earnings (CAPE) ratio, based on 10 years of earnings, stands at the fourth highest level in history for the S&P 500 index, trailing only the readings of 1929, 2000 and 2007.

Those peaks, of course, were followed by crashes.

So is that what we have in store for us now? Was Thursday's 2 percent drop in the S&P 500 the beginning of the end of the five-year bull market?

Maybe yes, but then again, maybe no, says Shiller. The CAPE ratio's current level "might be high relative to history, but how do we know that history hasn't changed?"

The long-term average for the ratio is "highly psychological," he said. "You can't derive what it should be."

The ratio is most accurate in forecasting a market move when the ratio is at an extreme, but now it is only at 25.3, not far from the 30-year average of 23.4.

If a sudden consensus arises that the economy is stuck in the muck, that might represent a negative "turning point," he stated.

Many other market participants are concerned by the 29 percent surge in the CBOE Volatility Index (VIX) since last Friday.

"Wall Street is in disarray this week, as the violent gyrations are causing havoc for fund managers and active investors hoping for a smooth fourth quarter," Todd Schoenberger, president of J. Streicher Asset Management, told CNBC.

"The fear factor is beginning to hit panic levels, as worries about a worldwide economic slowdown become real, despite round after round of stimulus and central bank intervention."

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Robert Shiller, the Yale University finance professor who shared the Nobel Prize in economics last year for his research on how stock prices fluctuate far more than logic can justify, said he keeps 50 percent of his portfolio in stocks and he didn't sell after Thursday's plunge.
Shiller, stock market, ratio, investing
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2014-43-10
Friday, 10 October 2014 01:43 PM
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