- Barron’s – Who Says This Stock Market Is Overpriced?
The market is now near its all-time highs. Yet, says Nobel laureate Robert Shiller, that doesn’t mean a turnaround is in the cards.
As the 30th anniversary of the 1987 stock market crash neared, Robert Shiller, the Nobel laureate and Yale University economist, mused on why today’s seemingly overpriced market continues to sleepwalk higher. The cyclically adjusted price/earnings, or CAPE, ratio that he and John Campbell devised in the 1980s is at its highest level ever, with two exceptions: shortly before the 1929 crash, which set the Great Depression in motion, and shortly before the dot-com bust. (The CAPE, which is based on average inflation-adjusted earnings over the trailing 10 years, stands at 31, versus 32.5 in 1929 and 44 in late ’99.) Investors’ behavior today, Shiller says, is shaped by a number of narratives that keep them in the market, including fears that robots will displace jobs and hopes that the Trump administration will stoke the economy.
Comment
- MarketWatch – It would take an ‘immaculate conception’ to create bear market in stocks right now: analyst
There is a ‘remarkable level of bullish “agreement” across the U.S. stock market’: Leuthold’s RamseyHow strong is the uptrend in the U.S. stock market? So strong that, according to one analyst, it would take divine intervention to stop it. “From a purely technical point of view, if a bear market is born this month it would have to be considered the result of some sort of ‘immaculate conception,’” wrote Doug Ramsey, chief investment officer of the Leuthold Group. Avoiding such a drop would actually mean a break with a loose historical trend where Wall Street suffers “a nasty second-half setback during each of the last 13 years ending in ‘7,’” he wrote in a report. “We think it’s likely stocks will close 2017 at higher levels; therefore any intervening ’Unlucky Sevens’ pattern weakness would need to materialize fairly quickly.” The “curse of the seventh year” refers to how, in recent decades, Octobers in years ending with seven (1987, 1997, and 2007) have been negative for markets. The pre-financial crisis bull market ended this month 10 years ago, while the Dow dropped more than 12% over October 1997. “Black Monday,” which still stands as the biggest single-day percentage decline on record, occurred in October 1987.
- The Financial Times – Are hints of euphoria starting to haunt this stock market rally?
Investors shed their post-crisis skepticism and learn to love the record-breaking runEuphoria is said to be the terminal stage of ageing bull markets. Although there are few signs of uncritical ebullience, investors are finally shedding some of their post-crisis scepticism — raising questions on just how much further markets can continue their record-breaking runs. President Donald Trump has been happy to flaunt the S&P 500’s return of nearly 16 percent this year. Indeed, the total return version of the flagship US equity index has now enjoyed 11 consecutive positive months, smashing past the last record run in 1995, and few would bet against the US stock market making it a 12-month streak of gains. But the 2017 rally is a global phenomenon, with Europe, Japan and the developing world also notching up a series of long and strong runs, buoyed by evidence of synchronised global economic growth and one attracting hefty inflows.
When Shiller was asked about his CAPE ratio near historic highs (highlighted above), he said:
Today, people have heard it said enough times that the market is unambiguously overpriced. The CAPE ratio is now at 31. The 10-year forecast based on CAPE is positive, but not a whole lot above zero. We’re in a different social environment. The narrative today is Donald Trump. It is a pro-business narrative, which I infer from his books, such as Trump: How to Get Rich. People aren’t in the frame of mind that we should worry about a crash.
In other words, “this time is different” and one must remain a fully invested bear.