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"My own way of thinking is that it sounds like an overreaction," Shiller said Friday at a conference in New York presented by the Wharton School. "We are launching a trade war, are not people thinking about it, is it a good thing, I do not know, but I think it will probably be a difficult time in the stock market."
Yale's economist is known for a number of revolutionary opinions and theories on the market, but perhaps especially for a measure that he uses to measure stock market valuations. The cyclically-adjusted price-earnings ratio – often referred to as the "CAPE Shiller" or "Shiller PE" – examines valuations over a 10-year period to mitigate cyclical fluctuations.
Currently, the gauge stands at 33.3, its highest level since June 2001. The index peaked near 45 in mid-2000, just as the dot-com bubble was about to burst. By testing the model over time, he saw the market collapse in 1929 and 1987 as well as the internet bubble.
Shiller warned that he did not anticipate a major calamity for the market, but rather a much lower level of return, in the 2.6% annual range, that investors expected during the bull market. 9 years. The longest rally in history has seen the S & P 500 rise more than 335% since the trough of March 2009.
"It's not like I'm predicting an accident," he said. "It's a 10-year return on investment – it will not be great because we're just too high at the present value."
Among other things, he said that the current fiscal climate would not last and that corporate profits would decline, as they did in the past.
"Is Donald Trump permanent?" he asked to laugh. "I will not get into that, a lot of contention about it."
To be sure, the Shiller CAPS was raised for years and went through 30 years ago. And not everyone agrees with his analysis – including his friend and 51-year-old training partner and his colleague at Friday's event, Jeremy Siegel.
Siegel is the finance professor Russell E. Palmer at the Wharton School and has long served as a bull to Shiller's bear. He challenged several points of Shiller, particularly on the question of whether the market must necessarily return to the trend and what he considers to be an oversight on the impact of low-to-low passive investment cost in the market. On this last point, thanks to the low-cost ETFs, it is now cheaper for investors to have a balanced portfolio, so they do not need such high returns to beat the market.
Although shares are expensive, according to Siegel, they remain a godsend relative to bonds when you consider the risk premium or the amount of return that investors demand relative to risk.
"Stocks are overvalued in the longer term, but bonds are enormously overvalued in the long run," he said. "The relative valuation of equities versus bonds is among the most favorable – not the most favorable but the most favorable – in history."
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