×
Newsmax TV & Webwww.newsmax.comFREE - In Google Play
VIEW
×
Newsmax TV & Webwww.newsmax.comFREE - On the App Store
VIEW
Tags: cape | fear | shiller | siegel

CAPE Fear: Shiller Alarms, While Siegel Assures

CAPE Fear: Shiller Alarms, While Siegel Assures
Yale Professor Robert Shiller (Brendan Smialowski/Getty Images)

Dr. Edward Yardeni By Monday, 18 September 2017 10:55 AM Current | Bio | Archive

The valuation question has been hanging over the current bull market.

Valuation ratios such as price/earnings, price/sales, and market capitalization/revenues are uniformly bearish, showing that stocks are as overvalued as they were just before the tech bubble burst in 2000.

On the other hand, valuation measures that adjust for inflation and interest rates, both of which are near record lows, suggest that the market is fairly valued. They are mostly in the Goldilocks range: Not too cold, and not too hot. Joe and I have been siding with Goldilocks.

Not surprisingly, Yale Professor Robert Shiller strongly disagrees with Goldilocks. He is issuing dire warnings that stocks are as grossly overvalued as they were in 2000. The man won the Nobel Prize in economics, so he must know something. He won primarily for his work on speculative bubbles, including his book Irrational Exuberance (2000). (Goldilocks dropped out of high school, and is now doing jail time for petty larceny.) The professor’s latest alarming views were reviewed last Friday in an article posted on Nasdaq.com titled “A Nobel Prize Winner's Dire Market Warning — And What To Do About It...”

Here are some of the key points and our takeaways:

(1) Trailing P/E. The article observes: ”The price-to-earnings (P/E) ratio of the S&P 500 … is about 24.5. This is about 67% above its long-term average of 14.7.” Our data, using four-quarter trailing earnings for S&P 500 operating earnings, show the P/E at 20.7 at the end of June, 37% above its long-term average of 15.1 since 1935 (Fig. 1). It is still well below its record high of 28.4 during Q2-1999.

(2) Forward P/E. The article focuses on backward-looking P/E measures, including Shiller’s CAPE, which is a cyclically adjusted measure based on earnings over the past 10 years. The four-quarter trailing P/E, using operating earnings, has exceeded the forward earnings P/E since 1989, which is when the operating data series starts (Fig. 2). The latter was 17.7 in August. That’s high, but still well below the record high of 24.5 during July 1999.

(3) CAPE. The article notes: “Nobel Prize-winning economist Robert Shiller's cyclically adjusted P/E ratio is also warning the market is overvalued. At 30.2, this ratio is more than 85% above its long-term average of 16.1.” Jeremy Siegel, the professor who wrote Stocks for the Long Run (1994), has yet to win a Nobel Prize despite his great long-term call. In a 2016 FAJ article, he sides with Goldilocks and counters Shiller’s pessimism as follows:

“Robert Shiller’s cyclically adjusted price–earnings ratio, or CAPE ratio, has served as one of the best forecasting models for long-term future stock returns. But recent forecasts of future equity returns using the CAPE ratio may be overpessimistic because of changes in the computation of GAAP earnings (e.g., “mark-to-market” accounting) that are used in the Shiller CAPE model. When consistent earnings data, such as NIPA (national income and product account) after-tax corporate profits, are substituted for GAAP earnings, the forecasting ability of the CAPE model improves and forecasts of US equity returns increase significantly.”

(4) VCI. In a 9/5 interview with Quartz, Shiller reported: “I have something I call a valuation confidence index [VCI]. I don’t have it really up to date because it’s only a six-month moving average based on small surveys. Maybe I should expand my size. But valuation confidence is at the lowest it’s been since around 2000. In other words, people think the market is highly valued. They don’t have to look at CAPE. People think it. I know that. Both individual and institutional investors. We are in a time of mistrust of the market. The only time mistrust of the market was lower since 1989 was in 2000.”

Shiller’s VCI seems a bit like licking one’s finger and raising it up in the air to see which way the wind is blowing. It seems a bit at odds with the conventional wisdom that the conventional wisdom must be bullish at market tops—not cautious. How else would we have gotten to these tops?

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.

© 2022 Newsmax Finance. All rights reserved.


EdwardYardeni
Shiller’s VCI seems a bit like licking one’s finger and raising it up in the air to see which way the wind is blowing. It seems a bit at odds with the conventional wisdom that the conventional wisdom must be bullish at market tops—not cautious. How else would we have gotten to these tops?
cape, fear, shiller, siegel
694
2017-55-18
Monday, 18 September 2017 10:55 AM
Newsmax Media, Inc.

Sign up for Newsmax’s Daily Newsletter

Receive breaking news and original analysis - sent right to your inbox.

(Optional for Local News)
Privacy: We never share your email address.
Join the Newsmax Community
Read and Post Comments
Please review Community Guidelines before posting a comment.
 
Get Newsmax Text Alerts
TOP

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved
NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved