Robert Shiller Warns of Stock Market Risks

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Based on his research of historical stock market valuations via the CAPE ratio, Nobel Prize-winning economist Robert Shiller said Thursday he sees the “risk of a substantial decline” ahead.

Despite recent market weakness and its related turmoil, the Yale University professor warned CNBC’s Becky Quick, “the market is high now.”

Shiller measures valuation utilizing the Cyclically Adjusted Price Earnings (CAPE) ratio, which consists of the price of index components divided by their 10-year average earnings.

“The CAPE ratio right now is around 25. It’s high,” Shiller stated. The historic average is approximately 17, a level that would correspond with about 11,000 on the Dow and 1,300 on S&P 500. A collapse to those levels would constitute more than a 30 percent bear market.

Shiller said he’s not saying that will happen, just the CAPE ratio serves as a “warning signal.” He also stated it’s possible the market could “go a lot higher” from where it currently stands since the CAPE reached 44 in the year 2000.

When asked whether he had taken his own money out of the stock market, Shiller responded that he had.

The notion suggested in economists Ian Ayres and Barry Nalebuff’s book Lifecycle Investing: A New, Safe, and Audacious Way to Improve the Performance of Your Retirement Portfolio
that young investors should go on margin should be reconsidered in light of current market valuations according to Shiller.

Back in August 2013, Shiller told CNBC’s Jackie DeAngelis the market bubble could burst at any time (link).

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